In the UK there are lots of different tax rates, thresholds and allowances available. With the start of a new tax year, it’s worth checking to make sure you’re making the most of your available allowances so that you can maximise your tax-free income and minimise your tax exposure. Peter Webb, our Head of Tax Advisory, takes a look at some of the allowances available for the new tax year.
The personal allowance is the amount of income you can earn each year before paying tax. Currently, this allowance is £12,570. However, it’s useful to note that your personal allowance reduces at the rate of £1 for every £2 you receive over £100,000. Therefore, it could be reduced to nothing at all if your income exceeds £125,140.
Marriage allowance is available to couples who are married or in a civil partnership. This allows a low earner to transfer £1,260 of their personal allowance to their partner, effectively reducing their partner’s tax by up to £252 in the tax year.
There are a few restrictions to be aware of. To benefit from this allowance the lower earner must normally have an income below £12,570. The higher earner must pay tax at the basic rate of 20% which means their income must fall between £12,571 and £50,270. For Scotland, the higher earner’s income must fall between £12,571 and £43,662.
The first £2,000 of dividend income is tax free, regardless of your total level of income. Dividend tax rates applied to dividend income in excess of the first £2,000 are 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
Personal savings allowance
For basic rate taxpayers the first £1,000 of interest income is tax free. The allowance is reduced to £500 for higher rate taxpayers and is withdrawn completely if you pay tax at the highest rate of 45%.
You may also be entitled to the £5,000 tax-free starting rate for savings. However, the starting rate is reduced by £1 for every £1 of other income you earn over your personal allowance. So, if your other income is £17,750 or more, you won’t be entitled to the starting rate for savings.
Capital gains annual exemption
There is a capital gains annual exemption of £12,300 for the tax year ending 5 April 2022. This means the first £12,300 of any gains made are free from Capital Gains Tax (CGT). But don’t forget that any unused amounts of your annual exemption can’t be carried forward and used in future tax years.
Individual Savings Account
As a UK resident, you’ve the right to invest into Individual Savings Accounts (ISA). For the current tax year, you can invest up to £20,000 into an ISA, in cash, shares or a mixture of both. Any income received within the ISA is Income Tax free and any capital gains from the sale of any stocks or shares is exempt from CGT.
Junior ISA accounts are available for children under 18 years old. The Junior ISA allowance for the year ending 5 April 2022 is £9,000.
If you earn money from trading activities such as self-employment or casual services, you can make up to £1,000 tax free. This is known as the trading allowance.
Pension annual allowance
Each year you can receive Income Tax relief on pension contributions up to 100% of your relevant earnings or £3,600 if greater. The annual allowance is a limit on the total amount of contributions that can be made to your pension schemes each year. It’s currently capped at £40,000 and is tapered away by £1 for every £2 your adjusted net income exceeds £240,000 (subject to threshold income being over £200,000). However, it can’t be reduced below £4,000 in 2020/21. Pension contributions above your available allowance attract Income Tax at your highest rate.
Inheritance Tax annual allowance
You can gift up to £3,000 every year without any Inheritance Tax consequence. Unlike the allowances mentioned above, if you don’t use the allowance, it can be carried forward into the following year. So effectively this could allow you to gift up to £6,000 in that second year. Bear in mind any unused allowance can only be carried forward for one year.
You can also make any number of gifts of up to £250 in a year without there being an Inheritance Tax consequence. This is called the small gifts exemption.
The number of days you can visit the UK without becoming UK tax resident
If you’re a British expat this is an important allowance to be aware of. Maintaining a non-UK tax resident status limits your exposure to UK Income Tax and CGT. The number of days you can spend in the UK without becoming UK tax resident may change each year depending on your personal circumstances, the number of days spent in the UK in previous years and your connections to the UK. Somewhat confusingly your allowance could be as low as 15 midnights or as high as 182 midnights. It is important to speak to an experienced professional adviser to understand what your limit is for maintaining a non-resident status for this year.
The UK tax system is very complicated and the allowances we’ve touched on are by no means an exhaustive list. It’s worth remembering that many UK allowances are available on a ‘use it or lose it’ basis. Therefore, if you don’t make use of the various allowances each and every year they can be wasted.