Updated: Aug 28
Many sole traders, landlords, and individuals miss out on potential tax savings simply because they are unaware of the personal tax allowances available to them. Often, this lack of awareness stems from a lack of information or guidance. To ensure you're taking advantage of all your entitled personal tax allowances, here's a breakdown of key facts and the six most common allowances that can significantly impact your tax liability.
Personal tax allowances are designed to allow you to earn or receive income up to a certain threshold without being subject to tax. These allowances vary and are applicable to UK taxpayers based on the type and amount of income, as well as individual circumstances. It's essential to note that some allowances are universally accessible to all UK taxpayers, while others depend on specific criteria.
To uncover available personal tax allowances, you can conduct your own research or seek advice from a professional advisor, such as an accountant. Notably, HMRC doesn't proactively inform individuals about potential tax allowances, underscoring the importance of taking initiative to discover these opportunities. Maximizing your utilization of these allowances and reliefs can significantly reduce your overall tax burden.
Let's delve into the six most prevalent personal tax allowances:
1. Personal Allowance:
This allowance pertains to the income threshold at which you start paying Income Tax. Whether you're employed or self-employed, you're entitled to a standard annual Personal Allowance, which for the 2023/24 tax year stands at £12,570. For income exceeding £100,000, the allowance diminishes by £1 for every £2 earned. Those with a taxable income of £125,140 or more do not qualify for the Personal Allowance.
2. Trading Allowance:
Geared towards self-employed individuals, the Trading Allowance offers a tax exemption of up to £1,000 annually. This allowance covers various sources of self-employment income, including casual work such as gardening, baking, or teaching. However, it's important to note that the Trading Allowance isn't available if the income stems from a company owned or controlled by you or a related individual. Claiming this allowance may not be optimal if your business expenses surpass £1,000 in a tax year.
3. Property Allowance:
Similar to the Trading Allowance, the Property Allowance extends a £1,000 yearly tax exemption, but it's specific to landlords earning taxable income from property rentals. If multiple owners jointly own a property, each co-owner can claim this allowance against their respective share of rental income. Notably, if you're both a self-employed individual and a property owner, you can claim both the Trading Allowance and the Property Allowance.
4. Dividend Allowance:
Individuals who receive dividends from company shares can make use of the Dividend Allowance, which stands at £1,000 for the 2023/24 tax year. This allowance enables you to pay tax only on dividend payments exceeding £1,000, provided your taxable income surpasses the Personal Allowance threshold. However, it's important to be aware that the Dividend Allowance is set to decrease to £500 in the 2024/25 tax year.
5. Marriage Allowance:
If you're married or in a civil partnership and your income falls below the standard Personal Allowance, you can potentially claim Marriage Allowance to reduce your partner's tax liability or vice versa. This allowance permits the transfer of £1,260 of your Personal Allowance to your spouse or civil partner, potentially resulting in up to £250 tax reduction for them in the tax year.
6. Blind Person's Allowance and Savings Allowances:
Individuals registered as blind can claim the Blind Person's Allowance, which offers an additional £2,600 of tax-free income in the 2023/24 tax year. Some of this allowance can be transferred to a spouse if not fully utilized. Additionally, the Personal Savings Allowance allows tax-free interest up to £1,000 for basic rate Income Tax payers and £500 for higher rate Income Tax payers. A starting rate of savings applies for those with lower income and substantial savings, offering up to £5,000 of tax-free interest, with eligibility criteria based on other income sources.
In conclusion, understanding and claiming personal tax allowances can lead to significant reductions in your tax obligations. Many taxpayers often miss out on these allowances due to lack of awareness, and the onus is on individuals to explore and make use of these opportunities. By staying informed about the available personal tax allowances and taking proactive steps to claim them, you can effectively minimize your tax burden and optimize your financial well-being.