How to Legally Reduce Your Tax Bill in the UK – Tax Planning Tips for 2025

As the cost of living continues to rise, many UK residents are searching for smart, legal ways to reduce their tax bill. With effective UK tax planning, you can take full advantage of available tax reliefs, allowances, and exemptions to keep more of your hard-earned income. Whether you’re a salaried employee, a small business owner, or a high-net-worth individual, understanding how to reduce tax in the UK through proper planning can result in substantial savings.

This guide offers essential personal tax advice UK residents can rely on to reduce their tax bill in 2025 without crossing any legal lines.

1. Maximise Your Personal Allowance

Every individual in the UK is entitled to a Personal Allowance, which is the amount you can earn before paying any income tax. For the 2025/26 tax year, the Personal Allowance remains at £12,570 (subject to any government changes). Make sure you’re not overpaying tax due to errors in your tax code.

Tax Tip: If your income is close to the £100,000 threshold, consider using salary sacrifice schemes or pension contributions to bring your taxable income below this limit and preserve your Personal Allowance.

2. Utilise Marriage Allowance

If you’re married or in a civil partnership and one partner earns less than the Personal Allowance, you could benefit from Marriage Allowance. It allows the lower earner to transfer up to £1,260 of their unused allowance to the higher earner, potentially saving up to £252 in tax per year.

Eligibility: The higher earner must be a basic-rate taxpayer (earning between £12,571 and £50,270).

3. Contribute to a Pension

One of the most effective strategies to reduce tax in the UK is to make contributions to a pension scheme. Contributions are eligible for tax relief at your marginal rate, meaning basic, higher, and additional-rate taxpayers can all benefit.

For 2025:

Annual allowance is £60,000, but tapers down for high earners.
You can also carry forward unused allowances from the previous three tax years.

Tax Tip: Employer pension contributions are also free from National Insurance – an added benefit for business owners.

4. Invest in an ISA (Individual Savings Account)

ISAs remain one of the most tax-efficient ways to save and invest money. For the 2025/26 tax year, you can invest up to £20,000 into an ISA – and all interest, dividends, and capital gains are tax-free.

Types of ISAs:

Cash ISAs – Good for emergency funds.
Stocks & Shares ISAs – Suitable for long-term investing.
Lifetime ISAs – Offer a 25% bonus from the government for first-time homebuyers or retirement savings (up to age 50).

5. Claim Work-Related Expenses

If you’re employed and incur work-related expenses that aren’t reimbursed by your employer, you may be able to claim tax relief. Common allowable expenses include:

Uniforms and protective clothing
Business travel and mileage
Professional fees and subscriptions
Working from home (claim flat rate or calculate actual costs)

Use HMRC’s P87 form or adjust your tax code to receive the benefit sooner.

6. Use the Dividend Allowance Wisely

If you own shares or operate a limited company, you can earn £1,000 in dividends tax-free in 2025. Any amount above this threshold is taxed depending on your income bracket:

8.75% for basic-rate
33.75% for higher-rate
39.35% for additional-rate taxpayers

Tax Planning Tip: If your spouse is in a lower tax bracket, consider transferring some shares to them to take advantage of their lower tax rate.

7. Gift Strategically to Reduce Inheritance Tax

If you’re thinking long-term, gifting assets during your lifetime can reduce Inheritance Tax (IHT) liabilities. You can give away:

£3,000 per year (Annual Exemption)
Unlimited gifts under £250 to different people
Wedding gifts (up to £5,000 for a child)

Gifts made more than seven years before death are usually exempt from IHT.

8. Invest in SEIS, EIS or VCTs

For higher-risk investors, the UK government offers generous tax reliefs for investing in startups and small businesses through:

SEIS (Seed Enterprise Investment Scheme) – Offers 50% income tax relief on up to £100,000.
EIS (Enterprise Investment Scheme) – Offers 30% relief on up to £1 million.
VCTs (Venture Capital Trusts) – 30% income tax relief and tax-free dividends.

Caution: These investments are higher risk, so seek financial advice.

9. Use Capital Gains Tax Allowances

If you sell shares, property (that isn’t your main residence), or other assets, you might be liable for Capital Gains Tax (CGT). For 2025, the CGT annual exempt amount is £3,000.

To reduce CGT:

Spread disposals across multiple tax years.
Transfer assets to your spouse to double allowances.
Offset gains with any capital losses.

10. Start a Side Business or Go Freelance

By registering as self-employed or forming a limited company, you open up access to a wide range of tax-deductible business expenses such as:

Office supplies
Travel costs
Training and development
Equipment depreciation

Running your business through a limited company can allow you to take income as a combination of salary and dividends, often resulting in lower tax liability.

11. Use Salary Sacrifice Schemes

Salary sacrifice arrangements let you exchange part of your salary for non-cash benefits such as:

Pension contributions
Cycle to Work scheme
Electric vehicle leasing

These schemes reduce your taxable income and National Insurance contributions, providing dual savings for you and your employer.

12. Review Your Tax Code Annually

Your tax code determines how much tax HMRC deducts from your salary. Errors can cost you hundreds each year. Make it a habit to review your tax code, especially after:

Changing jobs
Starting/stopping benefits (company car, etc.)
Receiving state pension or other income

13. Hire a Tax Adviser

While general guidance is helpful, nothing beats tailored personal tax advice UK residents can trust. A qualified tax adviser or accountant can:

Spot hidden opportunities for tax relief
Help with accurate record keeping
Assist with self-assessment returns
Prevent costly HMRC errors or penalties

Conclusion

Tax doesn’t have to be a burden – with effective UK tax planning, you can retain more of your income while remaining fully compliant with the law. Whether you’re an employee, entrepreneur, or investor, the tips above can help you reduce tax in the UK in a legitimate and strategic way.

Now is the time to act. Review your financial situation, take advantage of all available allowances, and don’t hesitate to seek personal tax advice tailored to your needs. With the right steps, 2025 could be your most tax-efficient year yet.