The UK personal tax system may seem complicated and difficult to navigate, but there are several opportunities to reduce your tax bill and save money through annual allowances.
As we start a new tax year, WHN’s wealth management team provides a reminder of the tax allowances you should know about in the UK. These helpful deductions enable you to earn a certain amount of income and utilising it without paying tax, and essentially keeping more money in your pocket.
1. Personal Allowance for income tax
This is the cornerstone of income tax relief, enabling everyone to earn a basic tax-free amount. For the 2024/25 tax year, this stands at £12,570. It is important to note that if your income exceeds £100,000, your personal allowance starts to reduce by £1 for every £2 of your adjusted net income.
2. Marriage Allowance
Married couples and civil partners can transfer unused personal allowance to each other, potentially reducing their personal tax by £252 per year. This is particularly beneficial if one partner earns significantly less than the other, normally this needs to be below the Personal Allowance threshold of £12,570.
3. Individual Savings Account (ISA) allowance
ISAs are designed to provide you with the opportunity to save without paying any tax on the interest or capital gains generated. The ISA allowance for the 2023/24 tax year is a generous £20,000, which can be spread across various types of ISAs such as Cash ISAs, Stocks and Shares ISAs, and Innovative Finance ISAs.
This makes ISAs a powerful tool for saving for retirement, a first home, or any other financial goal.
A new type of ISA was announced by the government at the Spring Budget 2024, that will provide a new tax-free savings opportunity for people to invest in the UK, while supporting UK companies. The UK ISA will have its own allowance expected to be £5,000 per year and will be in addition to the current £20,000 ISA allowance limit. Further details will follow when the new ISA is officially introduced by the government.
4. Capital Gains Tax (CGT) allowance
When you sell an asset (such as shares, property, or valuables) for more than you bought it for, you make a capital gain. Capital Gains Tax is a tax on the profit of this sale.
However, you can benefit from a tax-free allowance before any CGT becomes payable. For the 2023/24 tax year, the CGT allowance is £3,000 for individuals. For married couples and civil partners filing jointly, it is £6,000.
5. Contributions to a registered pension
Contributing to a registered pension scheme not only helps to build your retirement income, it also offers immediate tax relief. You can get up to 40 per cent tax relief of your gross earnings (up to a maximum of £60,000) paid into a pension each year.
Depending on your tax bracket, this potentially means that for every £100 you contribute to your pension, you could save up to £40 in tax.
Additionally, there’s an annual allowance of £60,000 which sets the total amount you can contribute across all your pension schemes in a year (including employer contributions) before facing tax charges.
Remember, these are just a few of the many allowances available in the UK. Exploring options like Gift Aid for charitable donations, travel expenses for work, and professional subscriptions can further reduce your tax burden.
By understanding and utilising these allowances, you can make the most of your hard-earned income and keep more money in your pocket. Remember, even small tax savings can add up over time, making a significant difference to your financial wellbeing.
This article provides general information and is not intended as tax advice. It’s crucial to consult with a qualified tax adviser for personalised guidance based on your specific circumstances.
WHN’s wealth management team can help you maximise your allowances and ensure you’re claiming everything you’re entitled to. As independent financial advisers, our team has the freedom to offer options from the whole of market thereby giving you choices that are right for you.
To discuss any aspect of wealth management please contact our team by emailing [email protected] or by calling 0800 808 9778.
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