Seven ways to (legally) pay less income tax

You don't need to employ an accountant, move your money offshore (or use tax avoidance schemes) to pay less tax.

With a few simple steps – from pension schemes to a company bus pass – you could be saving hundreds if not thousands of pounds a year.

1. Use your maximum ISA limit

The amount of money you can shelter from tax each year in an individual savings account (ISA) shot up from less than £12,000 to £15,000 on 1 July. This is the biggest annual increase in the ISA allowance since the tax-efficient vehicle was first established back in 1999.

What's more, archaic restrictions on how much of your allowance you could put in cash and how much in shares have been swept away and you can put whatever proportion you choose in each, right up to the £15,000 annual limit. Those who place their ISA cash in a savings account see the most immediate benefit as interest is earned tax free. Those looking to plough their ISA money into shares benefit from tax-free growth.

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2. Pay into a pension scheme

Pensions are about as glamorous as athlete's foot. However, they are probably the most tax-efficient investment you can make throughout your life. Contributions paid into a pension scheme attract tax relief at your marginal income tax rate.

This means, if you're a basic rate taxpayer, for each £1 you pay into a pension, in effect 20p is in the form of tax relief. Pension plans make even greater sense for those who earn enough to fall into a higher income tax bracket. For those paying 40 per cent tax, for every 60p from your salary invested a pension you'll see your plan credited by £1. As for highest-rate taxpayers, 45p, you only need to pay in 55p for each £1 you accrue.

This makes pensions the granddaddy of all personal finance tax breaks. Although there are restrictions to accessing your cash – you have to be 55 or over to be able to start taking money out of your pension pot – and the industry is dogged by the mis-selling scandal and high charges, it is in the main a tax-saving no-brainer.

3. Switch assets to a spouse or partner who pays basic rate tax

If you are married or in a civil partnership and one of you earns less than the other it may be advisable to switch income-earning assets, or property that if sold could be subject to capital gains tax, between the pair of you. Why? Well, each individual taxpayer has allowances they can use up before they are subject to tax.

For example, each person is entitled to earn £11,880 on a capital gain before tax is due, switch assets around between you and your spouse and it will be easy to make use of both your personal tax allowances. The same tactic applies to income. If one of you pays basic rate tax and the other pays higher rate tax, by making sure more income goes to the basic rate taxpayer you ensure the least amount of money goes out in tax. Happy days!

4. Check your tax code

The taxman sometimes gets things wrong, and quite badly so. For example, each year tens of thousands of people discover that they have been put on the wrong tax code by HM Revenue & Customs. As a result, the HMRC under- or overestimates precisely how much the individual is allowed to earn before they are liable to pay income tax.

If the amount is overestimated it means that you are likely to end up paying more tax than you legally ought to. Your tax code will appear on your salary slip as a series of digits with an L on the end. Check that it is correct against gov.uk tax information or on the HMRC's income tax pages. If there's any discrepancy, contact your nearest HM Revenue & Customs office.

Avoid tax on your savings: compare ISAs

5. Rent a room to a tenant

Few homeowners know that they can earn £4,250 a year from renting out a room before any tax is due on the income. This is a big tax break, in effect allowing you to earn rental income tax free (though it does of course mean having someone under your roof!).

6. Pay less National Insurance

Many people pay National Insurance when they legally don't have to. For example, if you remain employed beyond state pension age, you can apply to be exempt from future NI contributions. In effect you will be deemed to have done your bit and paid fully into the state system.

So why pay more? In addition, employed people whose main income is taken through PAYE, don't have to pay national insurance on small amounts that they earn from other work. If your second job or other source of income earns you less than £5,885 in a year, you can apply for a small earnings exemption from national insurance by contacting your local tax office. (This exemption doesn't apply to earnings from your main job.)

7. Join a salary sacrifice scheme at your workplace

Believe it or not, your workplace isn't just a place of, well, work; it is also an opportunity to save tax. Cycle-to-work schemes, bus passes for commuters, canteen tokens, staff car parking and childcare vouchers are all examples of how workplace salary sacrifice schemes can help you to save tax.

Your employer deducts money from your pay before tax is levied, then gives you a voucher to redeem for goods and services, such as childcare. Although you receive a lower salary – hence the 'sacrifice' bit – you don't pay tax on the proportion of your salary you are giving-up. What's more, you get an item or a service that you'd probably need to buy anyway.

However, be careful if you sign up to lots of salary sacrifice schemes at work, as your take-home pay could fall by a hefty amount, which, if you're not careful, could leave you short of cash for your day-to-day expenses.

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