How can you reduce your self-assessment tax return bill?

1. Maximise the use of your ISA allowance

When you invest your money, it’s vital to make use of tax allowances. Individual Savings Accounts – or ISAs – are often a first port of call owing to their simplicity and flexibility. There are several types, notably Cash ISAs and Stocks & Shares ISAs. Any money you make – either as interest on cash or investment income or gains – is free from tax, which can be really important for your long-term returns. 

If you’re over 18 and UK resident, you can pay up to £20,000 into a Stocks and Shares ISA each tax year to invest in shares, funds, investment trusts and more. If your investments go up in value, you won’t have to pay any capital gains tax when you sell. If they generate income, you won’t pay UK income tax either. Remember unlike cash, investments can fall as well as rise in value, and you could get back less than you put in. 

This could be particularly useful if you’re likely to be impacted by the dividend tax or capital gains tax changes. 

The dividend allowance, the tax-free amount you can earn in share dividends, has been progressively cut. The allowance, which is on top of the income tax personal allowance, was reduced from £5,000 to £2,000 in 2017. It has now almost disappeared altogether, falling to £1,000 in the 2023/24 tax year and to £500 in 2024/25. 

Meanwhile, Capital Gains Tax (CGT) is paid on the profits from the disposal of assets. There is a CGT annual allowance, £3,000 for 2024/2025 and 2025/26, having been as much as £12,300 in 2022/23, on which an individual pays no tax. However, CGT is payable on profits over that – from 30th October 2024 at 18% or 24% depending on an individual’s income tax position. 

Read more: How does a Stocks & Shares ISA work? 

2. 'Harvest' some capital gains

Those with capital gains, and therefore potential tax liabilities, could consider taking advantage of their CGT allowance by selling down investments. You’ll need to do so before the end of the tax year on 5 April. 

One option for existing shareholdings is a ‘Bed & ISA’ which can help use your CGT and ISA allowances simultaneously. It involves selling holdings and then buying them back in an ISA account. The sale triggers a capital gain, so selling or partially selling an existing investment could help with tax planning by using some of your capital gains allowance while keeping your holding. Outside of an ISA you are prevented from generating gains in this way owing to the ’30-day rule’ explained on the HMRC website. 

As well as harvesting capital gains while maintaining existing investments, a Bed & ISA can be used to tidy up small or non-tax-efficient parts of your portfolio or make more of neglected holdings. It could also reduce the work required to complete your tax return in the future. 

3. Divide assets

If you are married or in a civil partnership, it may benefit you to transfer assets to or from your partner. You usually don’t pay capital gains tax on assets you give or sell to your husband, wife or civil partner, though they may have to pay tax on any gain if they later dispose of it. 

This could give you the option of taking full advantage of two CGT allowances before they’re reduced in the new tax year. A married couple, for instance, could realise gains of up to £6,000 without paying tax. 

You could also divide assets to help maximise two dividend allowances or take advantage of lower income tax bands where one partner’s income is lower. This way there may be less tax to pay on investment income received outside of a tax wrapper. 

4. Power up pension contributions

In some circumstances, there are ways to reduce your tax bill through pension contributions and save efficiently for retirement. The downside is that you can’t access the money until retirement age. 

Whether you are employed or self-employed contributing to a pension can have the effect of lowering your taxable income as you receive tax relief at your highest marginal rate.  

For instance, when you pay into a personal pension such as our SIPP, the government adds 20%, representing relief for basic rate taxpayers, which is claimed from HMRC by the pension provider. For example, an investor contributes £8,000 into their SIPP and £2,000 is paid in on top, meaning £10,000 ends up in the account. 

For higher rate taxpayers or additional rate income taxpayers, a further 20% or 25% can be reclaimed. Using the £10,000 example above, an extra £2,000 or £2,500 can be repaid. This means a £10,000 pension contribution can cost as little as £5,500 in net income terms. 

If you’re a UK resident, under 75, the general rule is you can contribute up to your employed or self-employed earnings each year subject to a maximum of £60,000. However, there is a lower allowance for very high earners or those taking drawdown pension income. 

It is also possible to ‘carry forward’ unused allowances from the previous three tax years subject to sufficient earnings in the tax year you make the contributions. This can be particularly useful for the self-employed with lumpy earnings from year to year. Please note benefits depend on circumstances and this area can be complex, so it is worth considering regulated advice. 

If you have forgotten to claim higher or additional rate tax relief in previous years, you can make backdated claims for the past four tax years. 

For higher earners it is also worth considering how, in some cases, a pension contribution can help reinstate a full income tax personal allowance. Everyone starts with a personal allowance for tax-free income of £12,570, but that starts to be reduced by £1 for every £2 over a threshold of £100,000. Once income is over £125,140, the personal allowance is completely exhausted, but you may be able to get it back by paying into a pension to reduce earnings to below the threshold.  

Find out more about how to claim higher rate tax relief.