Four virtuous ways to save on your tax bill

31 January is the final deadline for filing self-assessment tax returns and, because it can be an arduous task, most people will put it off until the last minute.

Indeed, data from HMRC earlier this month showed that more than 16,000 people submitted their tax return online between Christmas Eve and Boxing Day. 2,590 people filed their tax returns on Christmas Day itself, prehaps in a last-minute bid to make sure any tax owed could be automatically deducted from their wages or pension (the deadline for this falls on 30 December).

If you were one of those people and would like to relax with mince pie and a glass of something instead next year, its worth remembering that the government doesn’t just take your tax money, it also gives you a number of allowances. Here are four ways to shelter as much of your hard-earned cash as you can from the tax man (through legitimate methods, of course).

1. ISAs

An Individual Savings Account (ISA) is a tax wrapper which can be used when you save money in cash or invest in stocks or funds. You can shelter up to £20,000 each tax year in an ISA and not have to pay any income tax, tax on dividends or capital gains tax in the future. Just as appealing is the fact that you do not have to declare any of your ISA holdings on your tax return. However, if the £20,000 maximum isn’t used in a tax year, you lose it forever and cannot carry it forward to subsequent tax years.

2. Pension contributions

Paying into your pension is a simple way to reduce your tax bill. You can invest up to £32,000 per annum, currently and the government will top up your pension automatically by 20% (to make a total of £40,000. Higher and additional-rate taxpayers can claim back another 20-25% through their tax return.

Unlike ISAs, the allowance for the current tax year can be topped up with any allowance that wasn’t used during the previous three tax years. It is possible to keep paying into a pension pot after you have taken money out, but contributions in excess of £4,000 per year may be taxed.

3. VCTs

Venture Capital Trusts – or VCTs – are investment vehicles which hold a portfolio of unlisted companies. They provide high levels of tax relief: 30% income tax relief on investments of up to £200,000 per year (although this only counts if the VCT shares are held for at least five years), tax-free capital gains and tax-free dividends. However, they are very risky and only suitable for certain investors. Again, you do not have to declare your VCT investments on your tax return.

4. Capital Gains Tax Allowance

If you do have assets held outside of an ISA, VCT or pension, don’t despair. While capital gains tax – or tax on any profit made from disposing of an asset – is deducted from anything which has been sold, given away as a gift or been received as compensation, you only have to pay the tax on overall gains above the £11,300 tax-free allowance. You may also be able to reduce your tax bill by deducting losses or claiming reliefs. Visit HMRC‘s website for more information.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views of the author and any people interviewed are their own and do not constitute financial advice.