UK Resident pays a significant portion of their earnings via tax. In this article, we will dive deep into the details of saving your hard-earned money by applying tax-saving tips. These tips will help you to maximise your income and wealth.
1. Personal Income Tax Allowance
Personal income tax allowance is the amount of income you can earn each year without paying income tax. The personal allowance limit for the tax year 2023-24 is £12,570. Hence, no income tax must be paid for earnings up to £12,570.
However, if your earning is more than £100,000 the personal allowance will be reduced by £1 for every £2 you make. This means that all taxpayers with an income over £125,140 do not receive the personal allowance.
Example: Mr Andrew earns income of £20,000. In this case, he would claim the personal allowance of £12,570 and pay income tax on the remaining income (£20,000-£12,570 = £7,430) at 20% amounting to £1,486.
2. Marriage Allowance
Marriage allowance is a scheme whereby the lower earner who earns less than the personal allowance can transfer 10% of their unused personal income tax allowance to the higher earner, reducing their tax bill. This scheme is applicable if you’re married or in a civil partnership.
The lower earner must have income below the personal allowance (£12,570) and their spouse/civil partner below the higher rate tax threshold (£50,271) to qualify for marriage allowance. This will help to save tax amounting £250 annually.
Example: Mr Harry and Mrs. Meghan are husband & Wife. Mr Harry earns £6,000 whereas Mrs. Meghan earns £40,000 in year. In this case Mrs. Meghan can claim the unused tax-free allowance amounting £1,260 resulting in tax saving of £252 (£1,260*20%).
3. Pension Contributions
Contributions up to the annual allowance limit, i.e., £60,000 or 100% of earnings, are eligible for tax relief. Further, Contributions made after the age 75 are not eligible for Tax relief. Pension contributions can be a beneficial way to save for retirement while reducing your current tax bill. An annual allowance of £60,000 will be lower if you have a high income or flexibly access your pension pot. The current lifetime allowance for pension is £1,073,100.
4. Individual Saving Accounts (ISAs)
Individual Savings Accounts (ISAs) allow you to earn interest on savings or investments tax-free up to a certain limit each year. The limit for ISAs contribution for 2023-24 is £20,000. There are four different types of ISA, viz. Cash ISAs, Stocks & Shares ISAs, Innovative Finance ISAs, and Lifetime ISA to which taxpayers can contribute.
5. Dividend Allowance
Dividend allowance is free up to £1,000 for tax year 2023-24 (£2,000 for tax year 2022-23). This allowance is particularly important to individuals who have invested in shares/stocks as well as directors of a company.
6. Personal Saving Allowance
Personal Saving Allowance, i.e., interest on savings, is tax-free up to £1,000 for non or basic-rate income taxpayers, whereas for higher-rate taxpayers, £500 is tax-free. All earnings in the form of savings interest are taxable for additional rate taxpayers.
7. Capital Gains Tax Allowance:
Taxpayers are also entitled to a tax-free allowance for capital gains each year. For the year 2023-24, no capital gain tax is required to be paid for capital gains amounting to £6,000. The capital gains tax after the above limit is 18% for the basic rate income taxpayers, whereas it is 28% for higher and additional tax rate payers.
8. Inheritance Tax Planning
Exemption from Inheritance tax can be claimed if you Gift assets to your loved ones while you’re still alive. Gifts may be exempt from Inheritance Tax if you survive for seven years after the gift is made. Even if the person passes away within 7 years of making the gifts, the gifts subject to inheritance tax will be taxed at 0% till £325,000.
9. Self-Employed Expenses
If you’re self-employed, ensure you’re claiming all allowable expenses to reduce your taxable profit. All the business expenses will be allowed if you run your business. Personal expenses are not allowed to be claimed.
10. Rent a room Relief
This scheme allows the taxpayer to receive £7,500 in rent from a lodger as a tax-free amount each year. You need to live and rent out the furnished accommodation in your home to claim the relief. The relief would be reduced proportionally to the number of people owning the home.