As a young professional, it’s easy to feel that tax planning isn’t a priority. With student loans, rent and saving for the future on your mind, taxes might seem like just another annual task. But taking control of your tax situation early on can save you money and put you on the right track financially. By understanding tax allowances, reliefs and investment opportunities, you can make smart financial decisions that benefit you in the short and long term.

Know your tax-free allowances

One of the most straightforward ways to reduce your tax liability is by using the available tax-free allowances. For the 2024/25 tax year, every individual has a personal allowance of £12,570. This is the amount of income you can earn without paying any tax. If your income exceeds this threshold, any earnings above this will be subject to income tax, with rates starting at 20%.

For those with savings, the savings allowance can also be advantageous. Basic-rate taxpayers can earn up to £1,000 of interest on savings tax-free, while higher-rate taxpayers have a £500 allowance. If you fall into the additional rate band, unfortunately, there is no savings allowance, but there are other strategies you can consider, such as individual savings accounts (ISAs).

Maximise your ISA contributions

ISAs offer a tax-efficient way to save. Any interest or capital gains earned within an ISA are completely tax-free, and for the 2024/25 tax year, you can contribute up to £20,000 across different types of ISAs (cash ISAs, stocks and shares ISAs and lifetime ISAs). By maximising your ISA contributions each year, you can build a significant savings pot that’s protected from tax.

If you’re under 40, a lifetime ISA (LISA) is an option worth exploring. You can contribute up to £4,000 per year and the government will add a 25% bonus to your savings – up to £1,000 annually. This is an excellent option if you’re planning to buy your first home or want to save for retirement. However, be mindful of the withdrawal penalties if you access the funds for non-qualifying reasons before the age of 60.

Consider pension contributions

While retirement may seem a long way off, starting pension contributions early has long-term benefits. Not only do you build a retirement pot, but contributions also come with tax relief. For basic-rate taxpayers, you can claim 20% tax relief, meaning that every £80 you contribute is boosted to £100. Higher and additional-rate taxpayers can claim even more relief, at 40% and 45% respectively.

The annual allowance for pension contributions is £60,000 or 100% of your earnings (whichever is lower), but if you’ve already accessed your pension, you may have a reduced limit. Additionally, if you’re enrolled in a workplace pension scheme, your employer’s contributions won’t count towards your annual limit – another bonus to help you save for the future while reducing your taxable income today.

Stay on top of student loan repayments

If you’re repaying a student loan, it’s important to factor this into your financial planning. The repayment threshold for Plan 2 loans, which covers most post-2012 university graduates, is £27,295 for the 2024/25 tax year. Once your income exceeds this amount, 9% of your earnings above the threshold will be deducted for loan repayment.

While these repayments are managed automatically through PAYE if you’re employed, if you’re self-employed or have multiple sources of income, you may need to set aside funds to cover repayments. It’s essential to include this in your budgeting, as underestimating your student loan repayments could result in a larger-than-expected tax bill at the end of the year.

Claim work-related expenses

Depending on your profession, you may be able to claim certain work-related expenses to reduce your tax liability. For example, if you’re required to use your own vehicle for business purposes, you can claim mileage allowance relief. The HMRC-approved rate for cars is 45p per mile for the first 10,000 miles, and 25p per mile thereafter.

Other expenses, such as professional memberships, training courses or equipment necessary for your job, may also be tax-deductible. Keep detailed records of these expenses and submit them when completing your tax return to ensure you’re getting the maximum relief available to you.

Think about the benefits of being self-employed

If you’re considering freelance or self-employed work alongside your regular job, it’s important to understand the tax implications. One of the main advantages is that you can claim allowable business expenses, which reduces your taxable profit. These can include things like travel, office supplies or even a portion of your home utility bills if you’re working from home.

Additionally, if you earn less than £1,000 from side gigs or freelance work, you won’t need to register for self assessment or pay tax on this income due to the trading allowance.

However, self-employment comes with added responsibilities, such as completing an annual self-assessment tax return and making payments on account. It’s important to stay organised and keep track of your income and expenses to avoid any surprises when it’s time to file your return.

Plan ahead with tax-efficient investments

As you progress in your career, you may want to explore tax-efficient investment opportunities. One option is venture capital trusts (VCTs) or the Enterprise Investment Scheme (EIS), which allow you to invest in high-growth companies while receiving tax relief. You can claim 30% tax relief on investments up to £200,000 in VCTs and £1m in EIS-qualifying companies (or £2m if invested in knowledge-intensive companies). Additionally, any gains made from these investments are exempt from capital gains tax, provided you hold them for the qualifying period.

While these options carry a higher level of risk than traditional investments, they can be a good fit for young professionals with a longer investment horizon and a higher appetite for risk. As always, it’s important to seek financial advice before making investment decisions.

Start early, plan wisely

Tax planning might not be the most exciting aspect of financial management, but it’s crucial to ensuring long-term financial success. By taking advantage of available allowances, investing in tax-efficient vehicles, and contributing to your pension, you can minimise your tax liability and set yourself up for future financial stability.

If you have any questions about tax planning or want to explore how Wells Associates can help you optimise your financial strategy, don’t hesitate to reach out to us.