FEW people enjoy handing money over to the taxman, but there are ways to keep your tax bill down.
You need to pay tax when you start earning over a certain amount, but Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, says certain loopholes can help lower your bill – here’s how.
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Brits are facing a brutal cost of living crisis, with the cost of everything from energy bills to petrol prices going up, and that means every penny counts.
Sarah said: “In the next tax year we’ll face a horrible hike in tax. Right now, with the cost of living crisis squeezing us so hard, we can’t afford to pay more than our fair share.”
But one thing in life you can’t avoid is paying taxes – or can you?
The first thing to know about is the personal allowance – this is the amount of income you can earn before you start paying any tax, and it’s currently £12,570.
Earnings over this amount are taxed at 20%, and once you earn £50,270, you’ll start paying 40% tax.
That means millions of low earners don’t pay any tax at all.
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But more workers could start paying tax this year, as the National Living Wage goes up to £9.50 in April, from £8.91, giving many people a £1,000 a year pay rise.
At the same time, the income tax bands will stay the same, which could offset the earnings increase for many people – or even leave some workers worse off than before.
Sarah said: “Because the income tax thresholds have been frozen, every pay rise will push more and more people into paying higher rates of tax.
“However, there are useful allowances that can help you cut your tax bill.”
She’s rounded up all the ways you can earn money using different allowances before you have to start giving money back to the taxman.
And it could mean you could earn over £20,000 before paying any tax at all.
Rent a room – £7,500
The rent a room scheme has become increasingly popular in recent years with the advent of sites like AirBnb, which have encouraged more people to rent out their homes.
If you rent out a furnished room of your home, the first £7,500 of rent you receive each year is tax-free.
This applies for long-term lodgers, short-term lets, and if you run a guest house or B&B.
The tax exemption is automatic so you don’t need to do anything.
But anything over £7,500 you earn from rent will be taxable and you’ll need to complete a self-assessment tax return to declare this income. .
Hobbies and side hustles – £1,000
If you have a hobby or make money on the side through things like babysitting or gardening, you could be in the money.
The trading allowance means you can make up to £1,000 tax-free from casual services.
Sarah said: “The allowance means money-spinners don’t have to become a tax headache.”
If you earn more than £1,000 in a tax year (which run from April 6 to April 5), you will have to tell HMRC and fill in a self-assessment tax return though.
According to HMRC, other odd jobs included in this allowance include money made at car boot sales, online selling or auction.
It could also include money made from food delivery or by charging other people for using your equipment or tools.
But Sarah warned: “Make sure you keep an eye on how much you’re making, because once you breach these allowances you’ll need to start taking tax into consideration.”
Rent your driveway or storage space – £1,000
You can make another £1,000 each tax year through the property allowance.
And if you jointly own property with another person, you each get the allowance – which means you can double your earnings.
You can’t use this allowance to offset earnings made from renting a room in your home, but you could for example rent out your driveway or garage space.
To do so you could rent out storage space or a driveway, for example.
Particularly in built up areas, where space is a premium – if you don’t use the driveway or storage space someone else might be willing to pay for it.
You can use the price guide tool by Park Let to get an idea of how much your parking space or garage is worth.
If you using the trading or property allowances, you should keep thorough records including bank statements, copies of any invoices and receipts.
Save into a Lifetime Isa – £1,000
Savers can stash up to £20,000 each tax year in an Isa, and any interest or investment gains you make are tax-free.
Sarah said: “Opening an ISA is a doddle and immediately protects everything in it from tax.”
But for those who are eligible, the Lifetime Isa brings a big bonus.
Lifetime Isas can be opened by anyone aged 18 to 39, and you can put £4,000 a year into these accounts.
Best of all, any money you save gets 25% top-up from the Government, so if you max out your allowance, you’ll get a £1,000 bonus.
There is a catch though – you can only use the money in the account either to put towards buying your first home, or when you reach retirement age.
If you access the cash at any other time, you’ll forfeit the bonus.
However, the generous government top-up means it’s a great option for first-time buyers and some people saving for the future.
Stash your savings – £1,000
Each year you get a £1,000 savings allowance, which is the amount you can earn in interest before you pay any tax.
For higher-rate taxpayers, the allowance is £500 a year instead.
This is great for any savers who don’t use an Isa, but instead have money in a standard savings account.
With interest rates currently at rock bottom, you would need to have an awful lot of money stashed away to max out this allowance.
However, if you’re not working, you can add this £1,000 to the £12,570 personal allowance, meaning you can earn more money before you start paying tax.
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