The latest data suggests that UK price rises could top the G7 in 2025. With many people feeling the rising cost of living, it is understandable that households are looking for ideas to cut needless expenses. Some changes are obvious such as cancelling unused subscriptions. Yet, have you considered your tax bill?
Below, our Carlisle financial advisers explain how overpaying on taxes can affect your financial plan and what to do about it. Do get in touch if you have any questions, thoughts, or to book a free, no-obligation chat with a team member.
The impact of overpaying tax
Certainly, many people are not paying their fair share of tax. In January 2025, for instance, the government reported that 5.4 million people are still due to file their Self Assessment. However, it is also undeniable that many people overpay on tax.
One study showed that 3.5 million people were due a tax refund in the 2012-13 tax year. The average refund value was between £350 and £500. This can happen for many reasons.
A common factor is changing jobs, which can result in someone getting placed on the wrong income tax code (e.g. emergency tax). Many people are also on the wrong council tax code, perhaps due to their property changing significantly in value.
Looking to cut costs in 2025? Consider checking your tax codes and rates. For the latter, here are some common tax rates to look at from the previous financial year:
- Income tax (what was your highest marginal rate?)
- How much of your income tax bill was due to tax on your savings interest?
- How much was due to other income sources – e.g. rent from Buy to Let tenants?
- Capital gains tax – did you sell investments, and what charges did you pay on profits?
- Dividend tax (from companies you own shares in).
- What was your National Insurance (NI) liability?
By gaining a clearer perspective on your tax liability from last year, you can go into 2025 with a better idea of what you may be paying over the coming months.
This can spark ideas to mitigate needless tax bills.
An example of tax savings
Income tax can be a heavy burden, especially for those on the higher and additional rates (40% and 45%, respectively). As such, if it is possible to relocate income out of higher brackets in a sensible way, then this could make a big difference to your finances.
Tax on interest is a good example. In 2024-25, a basic rate taxpayer can earn up to £1,000 from interest without income tax. For someone on the higher rate, however, their Personal Savings Allowance (PSA) is lowered to £500.
This system can cause unfortunate mishaps. For example, suppose you get a pay rise, which suddenly takes your earnings into the higher rate. As a result, your PSA lowers to £500 (maybe without you noticing). If you earned £900 in interest for that year, then £400 is suddenly liable to income tax at the 40% rate.
To avoid issues like this, it helps to plan far ahead with a financial adviser who can help you with contingency planning. One way to mitigate overpaying taxes could be to move certain cash savings into an ISA (where interest is earned tax-free).
Another option could be to move specific regular savings into Premium Bonds since the prize draws are not subject to income tax.
A holistic tax plan
It is easy to focus on your immediate finances – e.g. income and taxes on earnings – during a time of rising living costs. However, be careful not to neglect your wider goals or wealth.
In particular, have you considered taxes on your investments and estate (e.g. inheritance tax, or IHT)? Needless taxes on your portfolio, for example, could undermine your efforts to grow a comfortable retirement fund for later life. Here, a financial adviser can help you cover the relevant bases and ensure everything works together efficiently.
For instance, if you want to reduce capital gains tax (CGT) on your portfolio in 2025, one option might be to maximise your stocks & shares ISA (which allows for tax-free asset disposal; as well as tax-free dividends and income). However, investments inside ISAs are not automatically exempt from IHT when you die. Here, it is important to ensure your short-term tax plan and estate plan work together.
A financial planner can offer guidance through these complex considerations. One option might be to maximise your ISA allowance (£20,000 per year) during your career for tax-free growth, then maximise your Annual Exemption (IHT-free gifts) when you retire.
For more “adventurous” investors (those with a higher risk tolerance), another idea might be to invest in certain AIM-qualifying shares. These may qualify for a lower IHT rate under Business Relief rules, which are set to change in April 2026. An adviser can help you to explore other investments which also benefit from Business Relief that can be fully exempt from IHT on death.
To discuss your own financial plan, please get in touch to arrange a free, no-commitment consultation with an adviser here in Cumbria.
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.