How to Pay Less Tax: The Secret to Earning £40,370 a Year with No Tax!

You’re probably familiar with tax perks, but how much can they stack up and save? Here’s how to pay less tax with some simple steps.

How to pay less tax? Image shows a woman in a white suit sat at a laptop, smiling. On her left, a man in a black suit leans in to look at the screen, his expression focused. — How to Pay Less Tax

(5 minute read)

Today’s Friday Tax Tip explains:

How tax perks stack together
Common allowances you can claim
How to pay less tax

Personal Allowance

You’re likely already aware of the Personal Allowance. This is applied automatically unless you’re on an emergency tax code and allows you to earn £12,570.

But you might not know you can increase this allowance by 10%. If you’re married, you or your spouse can transfer part of your Personal Allowance to one another. This is great in situations where one spouse either doesn’t work or doesn’t use their full allowance.

For more information on that, check out our previous article.

Dividend Allowance

Dividends are shares of a business’ profits paid to shareholders. Most business owners are director-shareholders, meaning you can withdraw dividends from your company.

You can extract up to £2,000 in dividends per year without incurring tax.

Trading Allowance

Trading Allowance covers many miscellaneous forms of income, for example, occasionally selling products online or babysitting for a neighbour infrequently.

This allows you to earn an extra £1,000 without having to report it to HMRC or pay tax on it. Trading Allowance can be a little complicated, so we strongly recommend seeking professional advice to make sure you’re entitled to it.

Capital Gains Annual Exemption

Generally, you pay tax when you gain from the sale of assets. However, each year you benefit from a £12,300 allowance.

This means you won’t pay CGT on assets you dispose of below £12,300.

Even better, you can double this if you’re married and jointly own the asset. This gives you a potential £24,600 of tax-free money!

Housing

You can earn £1,000 from property income without paying any tax. Property income includes money from land or property, such as rent from a flat or parking space.

However, the real tax benefits come from Rent-a-Room relief. If you rent out a room (or rooms) in your house, you can earn £7,500 before having to pay tax on the income.

Unfortunately, these two allowances don’t stack so you’ll have to choose one or the other.

Interest on Savings

There are plenty of ways to keep more of your savings away from the taxman, but if you prefer keeping it simple, you can always save £5,000 without paying tax on the interest.

Remember, the £5,000 threshold is for those who earn under £17,570 per year. For every £1 you earn above this threshold, you lose £1 of the allowance.

Unless you’re a top-band taxpayer, you can also claim the Personal Savings Allowance of £1,000 if you don’t qualify for a worthwhile portion of the £5,000 saving.

Let’s do The Maths

If you fully use all the available reliefs and allowances we’re discussed, here’s what you can earn without tax.

£12,570 – Personal Allowance

£2,000 – Dividend Allowance

£12,300 – Capital Gains Annual Exemption

£1,000 – Trading Allowance

£7,500 – Rent-a-Room Relief

£5,000 – Tax-free interest on savings

£40,370 – Total tax-free income