You can still save income tax and lower your tax bracket if you act now (Image: Getty)
With just weeks to go until April, millions up and down the country are taking one last look at their finances to try to legally save on their tax bill.
The tax system works in financial years, so next year you will be made to pay any extra tax you owe from the period April 2024 to March 2025.
With just weeks to go until the end of March 2025, there are some last minute changes you can make now to try to legally bring your next tax bill down, especially if you’re teetering right on the edge of a ‘tax trap’ band change.
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Currently, the first £12,570 anyone earns is tax free (unless you earn over £100,000, where the allowance starts to decrease).
Then, your earnings between £12,571 and £50,270 are taxed at 20%, and earnings over £50,270 to £125,140 are taxed at 40%. Finally, earnings over £125,141 are taxed at 45%.
You could still legally save money on tax if you bring your income bracket down so that less of what you earned is subject to tax at a higher rate.
The first key way to reduce your tax is to make pension contributions. This is because any money put into your pension is not taxed at the point of contribution, and reduces the overall amount you ‘earned’ that is taxed.
As finance experts Frazer James explains: “Example – James earns £90,000 per year and contributes £10,000 to his pension. This reduces his taxable income to £80,000, saving £4,000 in tax. Over time, tax-free compounding inside his pension grows his retirement savings faster.”
Even if your employer won’t let you make any additional contributions to your pension beyond what you normally put in, you can use a SIPP now to reduce your tax burden.
A SIPP, or Self Invested Personal , is not subject to tax, even if you earned the money and then paid it into a SIPP afterwards. Effectively, you get ‘cashback’ on your tax. If you’re a higher earner, you can also claim more money back from the taxman via , reducing your taxable income.
As BestInvest explains: “Just like other pensions, investments in Self Invested Personal Pensions (SIPPs) grow free from Income Tax and Capital Gains Tax. But your SIPP tax benefits don’t end there.
“You also receive tax relief on your SIPP contributions. The Government tops up any money you pay into your SIPP and other pensions by 20%. Higher and additional-rate taxpayers can claim back a further 20% and 25% respectively via the self-assessment process.”
That means, if you earned over £50,270, you could put money into a SIPP, even after you’ve earned and paid tax on it, and then get the 40% tax money back from the government.
In turn, depending on how much you pay into your SIPP, you could pull your tax bracket back under £50,270 (or back under £125,141 for an additional rate taxpayer), which could also have other benefits.
The benefit of lowering your tax bracket means, not only do you lose less of that money above the threshold to tax, but you could also cut your tax bill in other ways.
These income bands also relate to savings interest – you can earn £1,000 of savings interest at 20% tax, but only £500 at the £50k bracket and no savings can be earned untaxed at £125k. Therefore by keeping your income tax band down, you can earn more savings interest without paying tax.
Also, those claiming could get more money. Currently, Child Benefit starts to be repaid if you earn over £60,000. But if you made SIPP contributions, you could bring your earnings back under £60,000 and not lose any of the benefit.
There are other ways to lower your tax bill, such as claiming Working from Home relief, if you’re eligible, and if you’re married, using methods like Marriage Tax Allowance and Capital Gains Tax transfers between spouses, but pension and SIPP contributions are the quickest and easiest way to cut your tax bill before the end of the tax year.