Five ways your tax return can make you better off

Hands up if you’ve not done your tax return yet? If the answer is no, you certainly won’t be alone.

While 38,000 people wrapped it up on New Year’s Eve, followed by a further 24,800 on the 1 January, with one week to go there were still 3.4 million people who had yet to get it done, according to HMRC figures, despite the upcoming deadline on 31 January.

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Completing a tax return is undeniably a chore; it can be a bit fiddly and you might need to hunt down some paperwork. Then there’s the bill you may well have to pay at the end. However, if you can reframe your tax return as an opportunity to boost your wealth, it can motivate you to crack on.

With this in mind, here are five ways your tax return can make you better off:

1) Get cash back on your pension contributions

Do you pay higher or additional rate tax? If you do, it’s important to check that you are getting the level of tax relief you are entitled to on your pension contributions.

Tax relief on pension contributions is equivalent to the rate of income tax that you pay. However, if you are paying into a personal pension that you arranged yourself, such as a SIPP, you will get only basic-rate tax relief (20%) applied automatically.

However, higher-rate taxpayers and additional-rate taxpayers can claim a further 20% or 25% back through their tax return, so it’s important you don’t gloss over this section of your return. You can get this in the form of a rebate (and pay it into your pension if you wish) or use it to reduce your overall income tax bill.

If you pay into a defined contribution (DC) workplace pension, whether you are getting the correct rate of tax relief will depend on how the scheme is administered. If it’s a “net pay” scheme, where your pension contribution is made before tax is deducted, you will automatically get the right level of tax relief and don’t need to take any further action.

This will also be the case if you make your pension contributions through a salary sacrifice arrangement with your employer.

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However, if your pension works on a “relief at source” basis, where your pension contributions are deducted from your salary after tax has been deducted, you will only get basic-rate tax relief applied automatically. To claim higher or additional-rate tax relief, you will need to complete a tax return.

If you aren’t sure how your workplace pension works, it’s important to check with HR to ensure you aren’t missing out on tax relief you’re entitled to.

2) Get cash back on your charitable donations

It’s not just pension contributions that get tax relief. You can also claim tax relief on any donations you make to charities over the course of the year.

When you make a donation to charity you’ll normally be asked if you pay tax in the UK. Answering this question with a yes will mean that the charity is able to take advantage of the Gift Aid scheme to claim basic-rate tax relief and boost the value of your contribution.

However, if you pay higher or additional-rate tax, you can claim a further 20% or 25% tax relief on your donation. As is the case with pension contributions, you can get a tax rebate or use the money to reduce your overall income tax bill.

To fully take advantage of the tax relief on charity donations, it’s important to keep good records.

3) Report any capital losses

When you complete your tax return you will be asked to declare any capital gains to see if you need to pay any capital gains tax (CGT).

However, you also get the opportunity to declare any losses that you have made. This is important as you can offset them against gains and reduce the amount of CGT you may need to pay.

Say you sold an investment with a £4,000 gain and another with a £1,000 loss. The loss can reduce the overall gain to £3,000 – the annual exempt amount for the year, meaning no tax would be payable.

Even if you haven’t made any gains this year, or CGT isn’t on your radar, it’s still good practice to report capital losses. That’s because you may be able to use them in future years.

You have up to four years to report losses to HMRC, so if you have any losses from previous years, you can declare those too.

It might not make any difference to your tax bill this year, but it could help you to reduce or avoid CGT in years to come.

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4) Keep more of your child benefit

If you, or your partner, claim child benefit and have a “high income” (over £60,000 for the current tax year or £50,000 for the 2023-24 tax year) you will need to start repaying the child benefit charge through the high-income child benefit charge.

The tapered charge means that once either parent earns £80,000 (£60,000 in 2023-24) all their child benefit is repaid through the tax charge.

If you are affected by the high-income child benefit charge you will need to complete a tax return.

However, it is possible to use your tax return as a prompt to take charge and reclaim some or all of your child benefit.

This is because the tax charge is based on your “adjusted income”, which is your total taxable income, less certain reliefs and allowances – one of which is pension contributions.

As such by increasing your pension contributions – or making an ad hoc lump sum payment – you can reduce the income that liability for the charge is based on.

If the amount you pay in is enough to bring your annual income down below the threshold, you may be able to keep all of your child benefit.

And the added plus is that you will have given your retirement finances a boost – especially when you bear in mind that you will get tax relief on that contribution too.

Currently, child benefit is paid at a rate of £25.60 a week for the eldest or only child and £16.95 for each additional child. That means the benefit is worth more than £2,200 a year for families with two children.

You can find out how much child benefit tax you need to pay with the government’s online calculator.

5) Reclaim your personal allowance

Just as increased pension contributions can help those affected by the child benefit charge, it can also help higher earners with incomes in excess of £100,000 a year.

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Once your income reaches six figures, your personal allowance – the amount of money you can earn tax free each year (currently £12,570) – is gradually tapered away. This is at a rate of £1 for every £2 over £100,000 that you earn, and it means that by the point you reach £125,140 you no longer get any benefit from the personal allowance.

The result is that you can end up paying an effective tax rate of 60% (you might have seen it referred to as the “60% tax trap”). However, as the tapering is based on your adjusted income, it’s possible to start clawing back your personal allowance by increasing your pension contributions. Let’s say your income is £110,000 a year – if you can afford to pay £10,000 into your pension, you’ll be able to get your adjusted income down to £100,000 and keep your whole personal allowance.

Your pension will also get a further £10,000 – plus tax relief at a rate of 40% – giving your retirement finances a healthy boost as well.