Personal Tax Allowances in the UK: A Comprehensive Overview

Personal Tax Allowances

Personal Tax Allowances in the UK: A Comprehensive Overview

Taxation is a vital part of every economy, and understanding the allowances can help individuals make the most of their income. In the UK, there are several tax allowances and reliefs that taxpayers should be aware of. This guide provides a detailed overview of the various personal tax allowances in the UK.

Understanding Personal Allowance

The personal allowance is the amount of income a person can earn each year without having to pay income tax. For the tax year 2022/23, this allowance is £12,570. It’s worth noting that the personal allowance may be reduced if your income is over £100,000.

Tax-Free Allowances for Interest and Dividends

Savings Interest

For those who have savings interest, the UK offers a tax-free allowance. The amount depends on which tax rate band you fall into:

  • Personal savings allowance for basic rate taxpayers: £1,000
  • For higher rate taxpayers: £500
  • Unfortunately, additional rate taxpayers do not get any personal savings allowance.

Dividend Allowance

If you own shares in a company, including perhaps your own limited company, there's a tax-free dividend allowance. For the tax year 2022/23, every taxpayer gets £1,000 tax-free dividend allowance. Beyond this, dividends are taxed at varying rates depending on your overall income level.

Additional Tax-Free Allowances

Marriage Allowance

The Marriage Allowance allows a spouse or civil partner who doesn't pay income tax (or pays at the basic rate) to transfer £1,260 of their personal allowance to their partner, provided the recipient pays tax at the basic rate. This can reduce the recipient’s tax by up to £252 annually.

Trading Allowance

For those dabbling in self-employment, there's a tax-free trading allowance. This allows you to earn up to £1,000 from self-employment without needing to notify HMRC. However, if you earn more than this threshold, you will need to report and potentially pay tax on the entire amount, not just the excess over £1,000.

Property Rental Income

Similar to the trading allowance, there's a tax-free property rental income allowance. This means that if you earn up to £1,000 annually from renting property, you don’t have to notify HMRC unless you opt to deduct costs instead of the £1,000 allowance.

Key Tax Reliefs

Tax reliefs are provisions that reduce the amount of tax you might otherwise owe. Here are some of the main ones related to personal taxation:

Maintenance Payments Relief

If you’re separated or divorced and you make maintenance payments to an ex-spouse or former civil partner, you might be eligible for Maintenance Payments Relief, especially if the one receiving payments was born before 6th April 1935.

Tax Relief on Charitable Donations

If you donate to charities or community amateur sports clubs (CASCs), you can get tax relief. When donating under Gift Aid, the charity can claim back 25p every time you donate £1 at no extra cost to you. Moreover, if you pay higher or additional rate tax, you can claim the difference between the rate you pay and the basic rate on your donation.

Rent a Room Relief

If you rent out a furnished room in your home, you can earn up to £7,500 tax-free annually (or £3,750 each if you share the income with someone else) under the Rent a Room Scheme. It's a valuable allowance for homeowners looking to earn a bit of extra cash.

Making the Most of Your Allowances

The UK's tax system provides numerous allowances and reliefs to help reduce the tax burden on its citizens. By understanding and utilising these effectively, you can ensure you're not paying more tax than necessary. Always consider consulting with a tax professional to ensure you're fully compliant while maximising the benefits available to you.

Note: Tax allowances and reliefs change regularly based on government policy. It's essential to stay updated with the latest figures from official HMRC publications or consult with a tax professional to get accurate and timely advice.

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About the Author

Annette Ferguson 

Owner of Annette & Co. - Chartered Accountants & Certified Profit First Professionals. Helping online service-based entrepreneurs find clarity in their numbers, increase wealth and have more money in their pockets.