How to Reduce Income Tax in the UK 2025: 12 Legal Tax-Saving Tips

Maximise Pension Contributions

Potential saving: £20–£45 for every £100 contributed, depending on your tax rate

Pension contributions are the single most powerful tax reduction tool available to UK earners. Every pound you contribute to a registered pension scheme receives tax relief at your marginal rate — 20% for basic rate taxpayers, 40% for higher rate, and 45% for additional rate.

For higher rate taxpayers, the mechanics work like this: you pay £60 into your pension, the pension provider reclaims basic rate (20%) relief from HMRC, adding £15 to make £75, and you claim back a further 20% (£25) through your Self Assessment return — total cost £60, total invested £100.

The annual contribution limit (known as the Annual Allowance) is £60,000 for 2025/26, or 100% of your earnings if lower. You can also carry forward unused allowances from the previous three tax years if you were a member of a pension scheme during that time. If your income exceeds £260,000 (threshold income £200,000), the tapered annual allowance reduces your limit by £1 for every £2 over the threshold, down to a minimum of £10,000.

If your adjusted net income is above £100,000, pension contributions are particularly valuable because they also restore your lost Personal Allowance — effectively giving you 60% relief on the contributions that bring your income back below £100,000.

Use Your Full ISA Allowance

Potential saving: All tax on future investment income and capital gains within the wrapper

An Individual Savings Account (ISA) shelters your savings and investments from income tax on interest, dividends, and capital gains — permanently, not just while the money is in the ISA. The annual ISA allowance is £20,000 for 2025/26, available to every UK adult.

Types of ISA available:

• Cash ISA: Savings account paying tax-free interest. Especially useful if you have used your Personal Savings Allowance (£500 for higher rate taxpayers, £1,000 for basic rate).
• Stocks and Shares ISA: Invest in funds, shares, and bonds within a tax-free wrapper. Ideal for long-term wealth building.
• Lifetime ISA: For ages 18–39, saving for a first home or retirement. Government adds a 25% bonus on up to £4,000 per year.
• Innovative Finance ISA: Holds peer-to-peer loans and similar investments.

You can hold multiple types of ISA in the same tax year but the combined contributions cannot exceed £20,000. Unused ISA allowances cannot be carried forward to the next tax year.

Salary Sacrifice Arrangements

Potential saving: NI saving of 8–12% on sacrificed salary (plus income tax relief)

Salary sacrifice (also called salary exchange) is an arrangement where you voluntarily give up part of your gross salary and receive a non-cash benefit of equivalent value instead. Because the sacrifice reduces your contractual salary, you pay income tax and National Insurance on a lower gross figure.

Common salary sacrifice benefits include:

• Pension contributions via salary sacrifice: The most tax-efficient way to contribute — you save NI as well as income tax.
• Electric vehicles: Company car schemes for fully electric cars attract very low benefit-in-kind rates (currently 2%), making them substantially cheaper than buying privately after tax.
• Cycle to Work scheme: Sacrifice salary to buy a bike and equipment, typically saving 32–42% of the cost (tax plus NI).
• Childcare (employer-supported): Some employers still offer salary sacrifice childcare via a Childcare Voucher-type arrangement.

Your employer must agree to the arrangement. Note that salary sacrifice arrangements can affect mortgage affordability assessments and state benefit entitlements, as they reduce your declared gross salary.

Claim the Marriage Allowance

Potential saving: up to £252 per year (or £1,008 with four years' backdating)

The Marriage Allowance allows one spouse or civil partner to transfer £1,260 of their unused Personal Allowance to the other. This reduces the receiving partner's tax bill by up to £252 per year (£1,260 x 20%). To qualify:

• You must be married or in a civil partnership
• The transferring partner must have income below the Personal Allowance (under £12,570)
• The receiving partner must be a basic rate taxpayer (income between £12,571 and £50,270)

You can backdate your claim to cover up to four previous tax years, potentially reclaiming over £1,000. Apply online through HMRC's website.

Claim Blind Person's Allowance

Potential saving: up to £2,870 x your marginal tax rate

If you are registered as severely sight impaired (blind) with your local authority, you are entitled to the Blind Person's Allowance of £3,070 for 2025/26 (check current HMRC figures). This is added to your Personal Allowance, meaning a larger slice of your income is tax-free. If your spouse or civil partner has more than enough income to use the allowance, they can transfer any unused portion to you.

Donate to Charity via Gift Aid

Potential saving for 40% taxpayers: 25% of each donation reclaimed via Self Assessment

When you make a Gift Aid donation, you declare to the charity that you are a UK taxpayer and consent to the charity claiming basic rate tax relief. The charity claims 25p extra for every £1 you donate from HMRC. As a higher or additional rate taxpayer, you can then claim the difference between your tax rate and the basic rate through Self Assessment:

• 40% taxpayer donates £100 → charity receives £125 → taxpayer reclaims £25 → net cost £75
• 45% taxpayer donates £100 → charity receives £125 → taxpayer reclaims £31.25 → net cost £68.75

Gift Aid also reduces your adjusted net income, which can help restore your Personal Allowance if your income is between £100,000 and £125,140.

Claim Professional Subscriptions and Expenses

Potential saving: depends on subscription costs and your tax rate

Many professional bodies and trade unions are approved by HMRC for tax relief on membership subscriptions. If you pay for a subscription that is relevant to your employment, you can claim tax relief on the annual cost. HMRC publishes a list of approved organisations. Relief is available at your marginal tax rate. You can also claim flat-rate expenses for work-related tools and equipment in many occupations — HMRC publishes standard flat-rate figures by industry.

Working from Home Allowance

Potential saving: £62.40/year (basic rate) or £124.80/year (higher rate)

Employees who work from home under a formal arrangement with their employer can claim tax relief on household running costs. HMRC's flat rate is £6 per week (£312 per year) without needing receipts or evidence. Higher amounts can be claimed with evidence of actual additional costs (heating, electricity, broadband). The claim can be made online through HMRC's Check Your Income Tax service or on your Self Assessment return.

Claim Mileage for Business Travel

Potential saving: depends on miles driven and employer reimbursement

If you use your own vehicle for business journeys (not the commute to your regular workplace), you can claim HMRC's Approved Mileage Allowance Payments (AMAP) rates. The current rates are 45p per mile for the first 10,000 miles and 25p per mile thereafter. If your employer reimburses less than the approved rate, you can claim tax relief on the difference through HMRC. If they reimburse more, the excess is taxable. For an employee driving 8,000 business miles reimbursed at 25p, the tax relief on the remaining 20p (£1,600) saves £320 for a basic rate taxpayer.

Company Car or Van Salary Sacrifice for EVs

Potential saving: thousands per year for higher earners

Fully electric company cars attract a benefit-in-kind (BiK) rate of just 2% for 2025/26, rising by 1% per year to 5% in 2027/28. For a higher rate taxpayer, a £40,000 electric car in a salary sacrifice scheme would generate a taxable benefit of just £800 per year (2% x £40,000), costing £320 in income tax. The same car purchased privately after tax would cost far more — making EV salary sacrifice one of the most compelling perks available to employees whose employers offer it.

Tax-Free Childcare

Potential saving: up to £2,000 per child per year (£4,000 for disabled children)

Tax-Free Childcare is a government scheme where HMRC tops up your childcare savings by 25%. For every £8 you pay in, the government adds £2, up to a maximum government contribution of £2,000 per child per year (£4,000 for children with disabilities). To qualify, both parents must be working and earning at least the National Minimum Wage for 16 hours per week, but neither can earn more than £100,000 per year. This is separate from the childcare element of Universal Credit.

Use the Capital Gains Annual Exempt Amount

Potential saving: up to £600 (basic rate) or £720 (higher rate) per year

Each individual has a Capital Gains Tax annual exempt amount (AEA) of £3,000 for 2025/26. Gains below this level each year are completely tax-free. If you hold investments outside an ISA, consider realising gains up to the annual exempt amount each year — a strategy sometimes called "bed and ISA" — by selling and rebying the assets inside an ISA. This gradually moves your portfolio into the tax-free ISA environment. Couples who jointly own assets effectively have a combined AEA of £6,000.