Five Strategies to Legally Save £20,000 on Taxes

Tax planning can significantly impact your financial wellbeing, especially when approached strategically and proactively. In this guide, five actionable methods are outlined to help individuals and families legally cut their tax liabilities by up to £20,000. These strategies apply to various income levels but use a married couple earning £240,000 annually in New York City as a specific example to demonstrate potential savings.

1. Fully Maximise 401(k) Contributions: Contributing the maximum allowable amount to traditional 401(k) retirement accounts can provide significant tax deductions. For 2025, the annual contribution limit is £23,500 per person. If both partners contribute fully, they can lower their combined tax liability by approximately £15,000 while also building their retirement savings. This often leads to not just an upfront tax reduction but also the benefit of lower effective tax rates.

2. Contribute to Health Savings Accounts (HSAs): For families with a high-deductible health insurance plan, HSAs offer the advantage of triple tax savings – no taxes on contributions, tax-free investments, and untaxed withdrawals for qualifying health expenses. Families can contribute up to £8,550 in 2025, potentially reducing tax liability by £2,700. Unused funds roll over and can be invested for future growth.

3. Utilise Flexible Spending Accounts: While HSAs provide broader healthcare savings options, additional accounts like limited flexible spending accounts (LEX HCFSA) can also be used to cover dental and vision expenses. These accounts allow contributions of up to £6,600 per year for a family, providing further tax savings. Similarly, Dependent Care FSAs (DCFSAs) enable working families to allocate up to £2,250 (based on income) towards childcare or eldercare costs before taxes, leading to additional reductions.

4. Invest in a 529 College Savings Plan: Families can reduce tax liabilities while saving for future education expenses by contributing to 529 savings plans. Contributions grow tax-deferred, and withdrawals remain untaxed when used for eligible educational purposes. Residents of states like New York can deduct up to £10,000 annually, leading to further savings, though some of these benefits might create minor federal tax adjustments in subsequent years.

5. Tailor Contributions Based on Future Planning: The choice between regular 401(k) accounts and Roth 401(k) plans hinges on anticipated future tax brackets. Decisions regarding these accounts should align with personal financial goals, as regular 401(k)s provide immediate deductions while Roth accounts offer tax-free growth and withdrawals.

Implementing these strategies collectively demonstrates how taxpayers can actively plan and adapt to take full advantage of existing frameworks. Beyond £20,000 in savings, such methods encourage long-term financial security by tying tax reductions to meaningful investments in health, education, and retirement. Ultimately, while such tax-saving measures depend on individual circumstances, taking deliberate steps can lead to substantial monetary benefits while securing one's financial future.