Most people will only think of maximising their tax allowances at the end of the year but, by then, it can easily be overlooked. With careful planning throughout the year you can make use of these valuable allowances and avoid losing them in the run up to the end of the tax year. 

Personal Allowance

This is the amount that you can earn in a tax year before having to pay income tax. This increased from £12,500 to £12,570 for the tax year 2021/22.

You will start to lose your personal allowance once you earn more than £100,000. For every £2 you earn over £100,000, you will lose £1 of the personal allowance. That means by the time you earn £125,140 you will have no personal allowance left and will be taxed on your whole income.

Marriage Allowance

You may qualify for the marriage allowance if you or your partner is a basic rate payer (earning between £12,571 and £50,270) and the other partner earns less than the personal allowance. By claiming this, the partner with income below the personal allowance can transfer up to 10% of their personal allowance to the partner that earns more. 

Dividend allowance

The tax-free amount you can earn from dividends in 2021-22 remains unchanged at £2,000. The tax rates are different to other income and depends on your income tax band:

Basic-rate taxpayers: 7.5% 

Higher-rate taxpayers: 32.5% 

Additional-rate taxpayers: 38.1%

Savings Allowance

Depending on your income, you can earn up to £6,000 on savings interest before having to pay tax on it.

Savings income is usually paid to you tax free. The savings allowance for the tax year is £1,000 for basic rate tax payers, £500 for higher rate tax payers and £0 for additional rate taxpayers.

For those on a lower income, below £12,570, there is a starting rate for savings income.  This allows you to earn another £5,000 per year in savings interest. For each £1 you earn over the £12,570 personal allowance, you will lose £1 from the £5,000 savings starting rate. Therefore, if you earn more than £17,570 you won’t have any of it left.

Capital gains tax annual exemption

Capital gains tax is a tax on the profit made when you sell (or gift) an asset that has increased in value. For example, this could include a property that is worth more on the housing market than it was when you bought it.

The annual exemption remains at £12,300 for the tax year.  

Any gains over this amount will be taxed depending on your income tax band and what you have sold. Basic rate tax payers pay 10% on assets and 18% on residential property, while higher and additional rate tax payers pay 20% on assets and 28% on residential property.

Any capital gains tax due on residential properties needs to be reported and paid within 30 days from the date of sale.

Trading allowance and property allowance of £1,000 

If you earn a small amount of income from work as a sole trader or on a property business below £1,000, you won’t need to inform HMRC. 

If you exceed £1,000, the allowance can be used to reduce your taxable income. You can’t use the £1,000 allowance and also claim tax relief for expenses. You will have to compare the amount of expenses paid out against the £1,000 allowance to see which is the most efficient for you. You will need to declare this on a self-assessment tax return. 

Rent-a-room scheme 

The Rent a Room scheme threshold is £7,500 per year.

This is the amount you can earn tax-free for letting a room in your home. This only applies to the property you live in. If you earn more than this threshold, you must submit a self-assessment tax return and declare the income.

Inheritance tax (IHT)

There are a variety of inheritance tax exemptions available to those looking to reduce the value of their taxable estate. The main reliefs and exemptions are:

Annual exemptions

Up to £3,000 can be given away each tax year. If the allowance hasn’t been used in a tax year, the allowance can be carried forward to the next year allowing £6,000 to be used.

Small gifts exemption

You can give up to £250 to as many people as you wish each tax year.

Gifts out of income

If your income regularly exceeds your expenditure, you can give away the excess if part of a settled pattern. 

By Mandy French, Director

For further advice, please do not hesitate to contact me or your local Thomas Westcott office.