Understanding Taxes and Saving Money

Image by TaxFix.co.uk

The end of the tax year is approaching. If you file your own tax return, you may be looking for ways to reduce your HMRC bill. If you pay income tax by the PAYE system, you may not have given it any thought.

As well as providing our free money manager, Money Dashboard are always looking for ways our users can cut some costs and save some money.

Tax Codes

The PAYE system allows income tax to be taken directly from your income. Your employer is given your tax code by HMRC, and this code determines how much pay you can receive before you have to pay tax and how much tax you have to pay taking benefits into account.

You will find your code on your payslip, on the P60 you receive at the end of the tax year, or on notices you receive from HMRC. It will be a small group of letters and numbers like K480 or 118L. If the letter comes after the number, multiplying the number by 10 will show you how much tax-free income you are entitled to in the next tax year.

The most popular tax codes are:

L - The basic personal allowance for someone under 65

P - A higher personal allowance for someone aged 65-74

Y - A higher personal allowance for someone aged 75 or over

BR - Taxed at the basic rate (20%). This usually means your allowances have been used up by other income.

D0 - A higher tax rate (40%) used for a second job or pension

D1 - A higher tax rate (50%) used for a second job or pension with a high income level

K - Your deductions are higher than your allowances

NT - No tax to pay on this income

T - Your tax code is under review or private

HMRC may also include allowances and reliefs in your tax code if you have to pay expenses for your job, such as fees for membership of a trade or professional organisation.

Reduce your Tax Bill

The following 10 money saving tips are designed to help you cut your tax bill:

  1. Check if your tax code is right. HMRC are a very large organisation and accidents do happen, if you're in the wrong tax code you might be paying too much tax.
  2. If you have ever been put on an emergency tax band or have any other reason to suspect you might have overpaid tax, apply for a rebate.
  3. Make sure you receive your personal allowance of tax-free income, and any other allowances or benefits you are entitled to.
  4. Find out whether you qualify for tax credits.
  5. To minimise the tax on inheritance you leave on your demise, make a Will.
  6. If you've gone over your personal tax-free allowance, see if you can move income-generating assets into the name of your partner or a family member who still has an allowance.
  7. Put your savings in a tax-free ISA.
  8. If you're self employed or a self assessment taxpayer by some other route, be sure to complete your return by 31st of January or you will be fined £100.
  9. Put savings or spare cash into your pensions; pensions are exempt from tax.
  10. If your tax situation is especially complex, it may be wise to hire an accountant, they may be able to pay for their own fee out of the savings they make for you, and taking that task off the table gives you more free time to earn.
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All content is for informational purposes only and is the opinion of the author. Nothing on this website should be interpreted as "advice". Money Dashboard Ltd make no representations as to the accuracy, completeness, suitability or validity of any information on this site and will not be liable for any errors or omissions or any damages arising from its display or use.

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