Tax & How To Pay Less Of It
- BetterAskAdam
- Feb 17, 2024
- 6 min read
Updated: Feb 19, 2024
If you're worried that you are missing out on tax allowances that could reduce the amount of tax you pay - here is a short guide to your allowances and how to make use of them.
A Tax Free Allowance of £12,570
Everyone is given a 'personal allowance' which is the amount you can earn tax-free.
The important word here is 'earn' as this relates to wages/salaries etc not you make from investing. That's also taxed but on a different system.
For the 2023-24 tax year, the personal allowance is £12,570.
Under current plans, the rate is being frozen until April 2028. So the value of your personal allowance will fall as inflation eats away at its real value. More people will also end up paying more tax as wages rise to above the tax-free personal allowance. This way, the government can get more tax revenue, without attracting potentially damaging headlines about raising the tax rate.
Quick Tax Facts
In England, Northern Ireland and Wales, you earnings will fall into three tax bands:
Basic Rate - 20% is charged on income between £12,571 to £50,270
Higher Rate - 40% is charged on income between £50,271 to £125,140
Additional Rate - 45% is charged on income over £125,140.
In Scotland the income tax rates are different:
Starter Rate - 19% is charged on income between £12,571 to £14,732
Basic Rate - 20% is charged on income between £14,733 to £25,688
Intermediate Rate - 21% is charged on income between £25,689 to £43,662
Higher Rate - 42% is charged on income between £43,663 to £125,140
Top Rate - 47% is charged on income over £125,140.
Losing Your Personal Allowance
You start by being allowed to earn £12,570 tax-free. But that allowance starts to disappear if you earn £125,140. The personal allowance is reduced by £1 for every £2 you earn over £100,000. By the time you earn £125,140, you'll have to pay income tax on all of your income.
Using Your allowances
1:Why People Like To Pay Themselves In Dividends Rather Than Salary
You're allowed to earn £1,000 in dividends before paying any tax. This is called the Dividend Allowance. This is due to fall to £500.
After that you pay a dividend tax rate, which varies depending on which income tax band you are in - but is much lower than the rate you would pay if you earned the money as a wage.
Basic-rate taxpayers pay 8.75% Vs 20% for wages
Higher-rate taxpayers pay 33.75% Vs 40% for wages
Additional Rate Taxpayers pay 39.35% Vs 45% for wages
On the face of it, this is a massive saving, especially for basic-rate taxpayers. It's also why many people find they can lower the tax they pay by working through a company and taking dividends instead of wages.
As you can see, the more you earn, the less advantageous the tax-break,
Taxing money out as a dividend rather than income, you avoid having to pay national insurance tax.
While this can cut your tax bill, it' not as advantageous as it first seems, because the company will have to pay tax on the income before it pays out the dividend.
2:The eBay Allowance (Other platforms are also available)
Properly but more boringly known as the 'Trading Allowance' enables people;e to make an additional £1,000 a year from casual trading – such as selling items on eBay, Vinted or small jobs done for other people.
3:The AirB&B Allowance (Here too, other platforms are also available)
Properly known as the 'property allowance' allows you to earn £1,000 for income from your land or property. It cannot be used together with the rent-a-room scheme (see below).
4:Rent-a-room scheme
The rent-a-room scheme allows you to earn up to £7,500 from letting a room in your home before the earnings are subject to income tax. However, this can only be applied to rooms being let in the property you live in.
The Tax Free Magic Of Pension Contributions
You get the tax back on money you put into a pension. This can be especially useful if you are nearing retirement age - as you can put the money in and don't have long to wait until you take it out again. You have to put money in from earned income and can only put a maximum of £60,000 a year. However, you can carry forward unused allowances from the previous three years. You can access your pension from 55.
Higher rate tax payers will therefore get an automatic 40% boost to any money they put into a pension.
The Joys of Marriage
Married couples and civil partners can reduce their capital gains tax bill by transferring assets into joint names. This combines both partners’ tax-free Capital Gains Tax Allowances – meaning you could double your allowance to £12,000 in 2023-24.
Slightly under half (49.4%) of couples are in a marriage or civil partnership in 2022. Yet there are tax and inheritance advantages to being married or in a civil partnership.[1a]
Married couples and civil partners can transfer money between eachother without facing tax charges.
If you’re selling something which will result in a capital gains tax, you would as an individual get an annual allowance of £11,700 profit tax-free. If you’ll go over this, you can still; avoid paying the tax by passing some of the asset to your spouse first, to use up both your allowances.
When you die, any money, property or assets left to your spouse is automatically exempt from inheritance tax.
Treatment of civil partners and married couples appears to be the same. Details here
It's An ISA
ISAs - or Individual Savings Account are tax free. What's not to like - right?
Well they may not be quite as attractive as they sound - although they can still be very useful.
For the 2023-24 tax year, basic-rate taxpayers can earn £1,000 of interest tax-free from savings or current accounts. Higher-rate taxpayers are entitled to a smaller allowance of £500. So you can earn £1,000 in interest each year even outside an ISA, and since few people earn that every year, you may not need the protection of an ISA anyway...
As long as the account is actually as good as one which isn't an ISA - it may well be worth getting, as you can just know it won't be taxed.
What I think may be more useful is an ISA with shares and other investments inside.
Over years one hopes that a fund with stocks and shares in it, might go up substantially.
The profit from the sale of shares and other assets can Capital Gains Tax. The amount of tax-free allowance on capital gains tax (CGT) will more than halve in the 2023-24 financial year. It will decrease to £6,000 for an individual and £12,000 for a couple. Since you can put £20,000 a year into an ISA - you might make more than the CGT allowance and the ISA tax protection, I can see, might be very valuable in this case.
Working From Home
Finally but still very importantly - You Might Be Able To Claim Some Expenses
You can claim certain job-related expenses. The general rule is that you're only allowed to claim costs for items or services you've bought 'wholly and exclusively' in relation to your job.
If you undertake work from home, then you may be able to claim relief for the additional household expenses incurred. The use of home as office deduction can be calculated as the total household running expenses (mortgage interest, council tax, utilities and so on) and then taking a suitable proportion of these. There is no set way to make the apportionment of the expenses but HMRC suggest that it should be done on an area and/or a time basis, as appropriate. [1]
More details from HMRC are here
You can either claim tax relief on:
Either £6 a week from 6 April 2020 (for previous tax years the rate is £4 a week) - you will not need to keep evidence of your extra costs
The exact amount of extra costs you’ve incurred above the weekly amount - you’ll need evidence such as receipts, bills or contracts
You’ll get tax relief based on the rate at which you pay tax. [2]
You want to be very careful about this deduction so that it doesn't jepordise your tax-free exemption when selling your home as your residence. (Take advice)
Note: Best to take some advice on all of the above as there is lots of small print which complicates the allowances and doesn't always make them worth claiming.
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