How to beat the taxman

If you are anything like me, you probably understand why we need to pay tax, but still get a bit annoyed when you see how much money you pay across to the taxman.

Your current situation

Apparently, the average salary in the UK in 2020 was £38,600 for a full-time job. I believe this is distorted by London salaries but we will roll with it.

Assuming that you are earning this average salary, you would be paying £5,204 in income tax and £3,484 in national insurance over the year.

This means that if you work 5 days a week, you are working 58.5 days a year just to line the taxman’s pockets. 

Whilst I personally believe that everyone should pay their fair share of tax, I do think that this is a high percentage of time to be working without the money ever being yours!

So how can you pay less?

Unfortunately, or fortunately, perhaps, I am a boring accountant who has had to learn the tax allowances inside-out. Tax allowances are amounts of income that you can earn in the UK without having to pay any additional tax.

So here are tax allowances you could use to your advantage and my suggestions;

1. Trading Allowance - Earn up to £1,000 in business income tax-free

Suggestion; start a side hustle such as an Etsy store!

2. Dividend Allowance - Earn up to £2,000 in dividends tax-free

Suggestion; begin a dividend portfolio outside of an ISA if you have already used the £20,000 annual ISA allowance. More on ISAs here.

3. Rent-a-room relief - Rent your home for £7,500 tax-free

Suggestion; if you are comfortable having someone stay in your spare room you could rent this out or even put it on Airbnb to get some tax-free cash!

4. Capital Gains Allowance - Earn up to £12,300 tax-free

Perhaps you fancy getting a little bit of crypto exposure. If you do, there is no tax-free way of trading/ investing in this so you may use your Capital Gains Allowance taking profits here.

The Takeaway

If you were able to fully maximise these allowances, you would be able to earn an additional £22,800 without paying another penny in tax! How crazy is that!?

Please note that this is not professional tax advice and the information is for educational purposes only. Do your own research before making any decisions that may impact your taxes.