Tax Free Allowances – Are you using yours?

2 March 2023

Ashleigh Blundell

Reducing Tax

There are various tax free allowances available to individuals in order to help them minimise their tax exposure.

With some planning, using these allowances can help you save tax on a yearly basis, here we look at the tax free allowances currently available.

Personal Allowance

Each person has a personal allowance which means any income received within this allowance will be tax-free. For 2022/23 (the tax year from 6 April 2022 to 5 April 2023) the personal allowance is £12,570.

Bear in mind however, if you earn over £100,000 for that tax year you will begin to lose this allowance. This can be regained by making pension contributions or gift aid donations and extending your tax rate bands

Annual Capital Gains Exemption

Every individual also has an annual capital gains exemption of £12,300 for 2022/23, meaning that £12,300 of gains or less per year will be tax-free.

This annual exempt amount is reducing from £12,300 in 2022/23 to just £6,000 in 2023/24 and even further to £3,000 for 2024/25. This means if you are planning on making any gains, you may wish to do this sooner rather than later for some additional tax savings.

Dividend Allowance

Taxpayers can earn up to £2,000 in dividend income tax free each tax year. The allowance is also available to your spouse or adult children which could save you tax if you transfer shares to them in order to utilise their allowance. The dividend allowance will reduce to £1,000 in 2023/24 and to £500 in 2024/25.

Personal Savings Allowances

With these, you will not pay tax on the first £1,000 of savings interest if you are a basic rate taxpayer (total income up to £50,270 per annum) and £500 for a higher rate taxpayer (total income less than £150,000 per annum).

Savings Rate Band

You can receive £5,000 of interest per annum tax free, this amount however reduces by £1 for every £1 you earn above your personal allowance (£12,570 for 2022/23). Once your total income, excluding dividends, exceeds £17,570 then you will not be eligible for the savings allowance at all.

Rent-a-room relief

You can rent a room in your main residence for up to £7,500 per annum tax-free. Any rent received over this amount will be taxed at your notional rate of tax.

Trading Allowance

The trading allowances is a tax exemption of up to £1,000 a year for individuals with trading income from self-employment, casual services (such as babysitting or gardening) or hiring personal equipment. This means you can earn up to £1,000 of trading income without having to pay any tax on it.

Please note if you have income over this you will need to register with HMRC to complete self assessment Tax Returns.

The trading allowance is still available for taxpayers under self assessment but only in lieu of actual business expenses paid out.

Property Allowance

You can rent your drive for up to £1,000 per annum tax free thanks to the property allowance (provided you have no other source of property income for that year).

Like the trading allowance, this is also available for taxpayers with property income over £1,000 for the year but only in lieu of the actual rental expenses paid out.

ISA Allowances

ISAs are a great tax free way to save money, for 2022/23 the ISA allowance is set at £20,000 per adult. This means that you can put a maximum of £20,000 into your ISA this tax year, £40,000 per couple and receive income from this investment tax free.

This includes dividend income, savings interest and capital gains held within the ISA.

There are different types of ISA investments to consider such as:

o Cash, £20,000 allowance, tax free interest

o Stocks and Shares, £20,000 allowance, tax free gains and dividends

o Innovative Finance, peer to peer lending, tax free interest

o Lifetime, £4,000 allowance, 25% top up from government, available for those aged 18-39. Used for house deposit or retirement investment

o Junior Cash, £9,000 allowance, tax free interest

o Junior Stocks and Shares, £9,000 allowance, tax free gains and dividends.

Utilise your spouse’s allowances

If you or your spouse/civil partner receive income from investments or property in excess of the allowances mentioned previously and you are not utilising your allowances, then you might want to consider transferring assets to one another.

The asset would be transferred at a “nil gain nil loss”, and the recipient would acquire the transferor’s base cost. By doing so, you would be able to make use of any unused income tax allowances as well as capital gains tax annual exemption if you were planning on disposing of the asset.

If however, transferring assets is not available to you but you or your spouse or civil partner fail to utilise your personal allowance (currently £12,570) then for basic rate taxpayers up to £1,257 (10%) can be transferred to the spouse or partner. This extends the higher taxpayer’s personal allowance by this amount, saving tax of up to £251.40 for the year. This transfer is however not available for taxpayers with income above the higher rate band of £50,270 for the year.

A guide on transferring your personal allowance and further information can be found in the marriage allowance area on the government website.

Talk to us about Tax Free Allowances

If you are interested in making the most of the tax free allowances and would like further information or assistance, please email Ashleigh Blundell or call us on 01634 731390

The content in this blog is correct as at 08/02/2023. See terms and conditions.