How to Pay Less Tax UK

Discover smart ways to legally reduce your UK tax bill, from ISA use to pensions, gifting, capital gains strategies and dividend allowances.

Nobody wants to pay more tax than necessary. Fortunately, the UK tax system offers a range of allowances, reliefs and exemptions that can help you reduce your bill without breaking any rules. Whether you’re looking to save on income tax, capital gains tax or inheritance tax, there are opportunities for both individuals and couples to optimise their finances.

This guide explains what you’re taxed on, and the key tax-efficient strategies you can use to pay less legally.

What Do You Pay Income Tax On?

In the UK, income tax is payable on earnings including:

  • Wages or salary

  • Profits from self-employment

  • Rental income

  • Pensions (excluding the State Pension in some cases)

  • Savings interest above the personal savings allowance

  • Dividends from shares above the dividend allowance

The rate you pay depends on your total income and tax band, with additional tax rates applying to high earners. Tax planning can help reduce taxable income and take full advantage of the allowances available.

1. Use Your Annual ISA Allowance

Each UK resident has an annual ISA allowance of £20,000 (2024–25 tax year). Money saved or invested in an ISA grows free of income tax and capital gains tax. You can choose between:

  • Cash ISAs

  • Stocks and Shares ISAs

  • Lifetime ISAs

  • Innovative Finance ISAs

Using your ISA allowance each year is one of the simplest ways to protect long-term savings and investment gains from tax.

2. Use Your Capital Gains Tax (CGT) Allowance

If you sell assets like shares or a second property, you may be liable for CGT. Each individual has an annual CGT exemption of £3,000 (2024–25). Gains above this are taxed at:

  • 10% for basic-rate taxpayers

  • 20% for higher-rate taxpayers

  • 18% or 24% for residential property

You can reduce CGT by making use of your full annual allowance each year, spreading gains across tax years, or sharing ownership with a spouse.

3. Share Assets with Your Spouse or Civil Partner

Married couples and civil partners can transfer assets between each other without triggering capital gains tax or income tax. This allows you to:

  • Make use of both CGT allowances

  • Use both ISA allowances

  • Utilise the lower earner’s tax bands for income-producing assets like shares or rental property

This is especially useful if one partner is a basic-rate taxpayer and the other is higher-rate.

4. Use the Marriage Allowance

If one partner earns less than the personal allowance (£12,570) and the other is a basic-rate taxpayer, you may be eligible for the Marriage Allowance. This allows you to transfer up to £1,260 of unused personal allowance to your spouse, reducing their tax bill by up to £252 a year.

5. Make Use of Your Pension Contributions

Contributing to a pension is one of the most tax-efficient ways to save. You can usually receive tax relief on contributions up to:

  • 100% of your annual income

  • A maximum of £60,000 (as of 2024–25), depending on your earnings

For basic-rate taxpayers, the government adds 20% tax relief automatically. Higher and additional rate taxpayers can claim an extra 20% or 25% via their tax return. This reduces your taxable income and builds a retirement fund.

6. Use the Personal Savings Allowance

The personal savings allowance lets you earn interest on savings without paying tax:

  • £1,000 for basic-rate taxpayers

  • £500 for higher-rate taxpayers

  • £0 for additional-rate taxpayers

To keep interest tax-free, use ISAs or keep savings within the allowance limit.

7. Consider the Dividend Allowance

If you receive income from shares, the first £500 of dividends (2024–25) is tax-free. Dividends above this are taxed at:

  • 8.75% for basic-rate taxpayers

  • 33.75% for higher-rate

  • 39.35% for additional-rate

Holding shares within a Stocks and Shares ISA avoids dividend tax altogether.

8. Gifting to Reduce Inheritance Tax (IHT)

Inheritance Tax is charged at 40% on estates over £325,000, or up to £1 million for married couples passing on a family home.

To reduce IHT:

  • Use the £3,000 annual gift exemption

  • Give small gifts of up to £250 per person

  • Make wedding gifts (up to £5,000 for children)

  • Make regular gifts from income

  • Give larger gifts and survive seven years to avoid IHT under the seven-year rule

9. Bed and ISA or Bed and SIPP

You can sell investments and repurchase them within a tax-free wrapper like an ISA or SIPP (Self-Invested Personal Pension). This is known as Bed and ISA or Bed and SIPP and allows you to shelter future growth and income from tax.

There may be CGT implications when you sell, so consider timing and allowances before proceeding.

10. Consider EIS, SEIS and VCT Investments

These government-backed schemes offer generous tax relief for investors in start-ups and small businesses.

  • EIS (Enterprise Investment Scheme) – 30% income tax relief, CGT deferral and no CGT on profits if held for 3 years

  • SEIS (Seed Enterprise Investment Scheme) – 50% income tax relief, plus CGT relief

  • VCTs (Venture Capital Trusts) – 30% tax relief and tax-free dividends

These are higher-risk investments but can significantly reduce your tax bill if used correctly.

Final Thoughts

Paying less tax in the UK is perfectly legal when you use the allowances and reliefs the system offers. From ISAs and pensions to gifting and smart investing, there are many ways to cut your tax bill.

The best approach will depend on your income, assets and financial goals, so review your strategy annually and seek professional advice if your situation is complex. A few smart choices now can save thousands in the long run.