Are you making the most of your tax allowances?

Personal income tax. You have a personal tax allowance of £12,570 before you pay tax on your income. 

If you’re likely to earn over £100,000 you’ll find your personal allowance reduces by £1 for every £2 of additional adjusted net income. This is your total taxable income before personal allowances and relief for trading losses, charity donations and gross pension contributions. So, for example, if you have annual income of £125,140 you will lose all your tax free personal allowance. 

 

Option 1: Pension contributions. If you afford it, you can make contributions to your pension or Gift Aid donations. You can deduct the gross amount from your income to reduce your adjusted net income. You can retain some or all your personal tax allowance to reduce your overall personal tax bill. 

 

Option 2: Married Couples Allowance. A spouse or civil partner can transfer some of their unused tax allowance. This could reduce your year’s tax bill by between £436 and £1,127. Usually the lower-earning partner’s income is less than their personal allowance. The other partner must pay at least basic level tax. 

 

Dividends. Paying dividends from the profits of a limited company is a tax-efficient way to receive some of your salary. You have a tax free dividend allowance of £500 per year. Tax on dividends above the allowance is still lower than income tax. 

 

Individual Savings Accounts (ISAs): You have an annual tax free savingsallowance in ISAs of £20,000, frozen until 5 April 2030. This might be a good option if you’re approaching the higher or additional tax threshold for income tax. 

 

Capital Gains Tax (CGT). Your annual capital gains tax (CGT) allowance is £3,000. CGT applies to your personal belongings, property, non-tax-free shares and business assets. CGT doesn’t normally apply to gifts to your spouse or civil partner or to charity. You might consider selling assets outside of your ISAs to benefit from this allowance. 

 

Gifts. If you have enough income for your needs, you can give small tax free gifts up to £250 per person each tax year. You can only do this if you haven’t already used another allowance for the same person. You can also make regular payments from your income if they don’t affect your standard of living. Gifts can help reduce the value of your estate and reduce the amount of inheritance tax payable when you die.