Taxes are an inevitable part of our financial landscape, but did you know that there are legitimate ways to reduce your tax liability?
Enter the realm of tax-free allowances, where you can uncover opportunities to save your hard-earned money within the bounds of the law.
In this blog post, we'll take a deep dive into the world of tax-free allowances, from personal allowances to income tax bands, let's explore the smart path to keeping more of your money in your pocket.
The below are the tax free amounts you can earn, for the different types of income:
Main allowances | 2023/24 | 2022/23 |
|---|---|---|
Personal Allowance (PA)*† | £12,570 | £12,570 |
Blind Person's Allowance | 2,870 | 2,600 |
Rent a room relief | 7,500 | 7,500 |
Trading income | 1,000 | 1,000 |
Property income | 1,000 | 1,000 |
*Note: If earnings over £100,000 you will lose £1 of your tax free allowance for every £2 you go over £100,000. If you earn over £125,140, you will not receive any tax free allowance.
†£1,260 of the PA can be transferred to a spouse or civil partner who is no more than a basic rate taxpayer, where both spouses were born after 5 April 1935.
Income tax bands
Rate Bands | 2023/24 | 2022/23 |
|---|---|---|
Basic Rate Band (BRB) | £37,700 | £37,700 |
Higher Rate Band | 37,701-125,140 | 37,701-150,000 |
Additional rate | over 125,140 | over 150,000 |
Personal Savings Allowance | 2023/24 | 2022/23 |
|---|---|---|
– Basic rate taxpayer | 1,000 | 1,000 |
– Higher rate taxpayer | 500 | 500 |
Dividend Allowance | 1000 | 2000 |
BRB and additional rate threshold are increased by personal pension contributions (up to permitted limit) and Gift Aid donations.
Tax Rates differ for General, Savings and Dividend income within each band:
Rate Bands | 2023/24 | 2022/23 |
|---|
G% | S% | D% | G% | S% | D% | |
Basic | 20 | 20 | 8.75 | 20 | 20 | 8.75 |
Higher | 40 | 40 | 33.75 | 40 | 40 | 33.75 |
Additional | 45 | 45 | 39.35 | 45 | 45 | 39.35 |
General income (salary, pensions, business profits, rent) usually uses personal allowance, basic rate and higher rate bands before savings income (mainly interest). To the extent that if savings income falls in the first £5,000 of the basic rate band, it is taxed at nil rather than 20%.
The first £1,000 of dividends are taxed at nil.
High Income Child Benefit Charge
1% of child benefit will be lost for each £100 of income between £50,000 and £60,000.
Registered Pensions
Registered Pensions | 2023/24 | 2022/23 |
|---|---|---|
Annual Allowance (AA)* | £60,000 | £40,000 |
Lifetime Allowance (LTA) | 1,073,100 | 1,073,100 |
The AA is usually reduced by £1 for every £2 by which relevant income exceeds £260,000 (2022/23: £240,000), down to a minimum AA of £10,000 (2022/23: £4,000).
The AA can also be reduced to £10,000 (2022/23: £4,000), where certain pension drawings have been made.
In 2023/24 there is no LTA charge on excess pensions savings. The maximum tax-free pension lump sum is £268,275 (25% of LTA), unless a higher amount is “protected”.
Car and Fuel Benefits
Cars
Taxable benefit: List price multiplied by chargeable percentage.
2023/24 and 2022/23
CO2 emissions: g/km | Electric range: Miles | All cars: % |
|---|---|---|
0 | N/A | 2 |
1-50 | >130 | 2 |
1-50 | 70 - 129 | 5 |
1-50 | 40 - 69 | 8 |
1-50 | 30 - 39 | 12 |
1-50 | <30 | 14 |
51-54 | N/A | 15 |
Then a further 1% for each 5g/km CO2 emissions, up to a maximum of 37%.
Diesel cars that are not RDE2 standard suffer a 4% supplement on the above figures but are still capped at 37%.
Car Fuel
Where employer provides fuel for private motoring in an employer-owned car, CO2-based percentage from above table multiplied by £27,800 (2022/23: £25,300).
National Insurance Contributions
National Insurance Contributions 2023/24
Employee | Employee | |
|---|---|---|
Main NIC rate | 12% | 13.8% |
No NIC on first | £242pw | £175pw |
Main rate charged up to* | £967pw | no limit |
2% rate on earnings above | £967pw | N/A |
Employment allowance per qualifying business** | N/A | £5,000 |
*Nil rate of employer NIC on earnings up to £967pw for employees aged under 21, apprentices aged under 25 and ex-armed forces personnel in their first twelve months of civilian employment.
Employer contributions (at 13.8%) are also due on most taxable benefits (Class 1A) and on tax paid on an employee’s behalf under a PAYE settlement agreement (Class 1B).
Class 2 (Self employed)
Flat rate per week if profits above £12,570 | £3.45 |
|---|
If profits are less than £6,725, Class 2 must be paid voluntarily to maintain entitlement to full state benefits (including the state pension).
Class 3 (Voluntary)
Flat rate per week | £17.45 |
|---|
Class 4 (Self employed)
On profits £12,570 – £50,270 | 9% |
|---|---|
On profits over £50,270 | 2% |
Making Tax Digital
HMRC confirmed in December that Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) will be delayed by a further two years, until April 2026. The new legislation will come into effect in April 2026 for businesses, self-employed individuals and landlords with gross income over £50,000, and in April 2027 for those earning over £30,000.
Value Added Tax
Registration threshold
The VAT registration and deregistration thresholds will remain frozen at their present levels of £85,000 and £83,000 until 31 March 2026. This will tend to require more businesses to register for the tax as they grow, and therefore represents a small tax-raising measure.
Corporation Tax
Rate of tax
On 1 April 2023, the Corporation Tax rate will increase from 19% to 25% for companies with profits over £250,000. Between £50,000 and £250,000 there will be a tapering calculation that produces an effective marginal rate of 26.5% on profits between these limits, but an average rate on all profits of between 19% and 25%. The limits will be divided between companies that have been under common control at any time in the previous 12 months, whether UK resident or not.
Companies with an accounting period that straddles 31 March 2023 will time apportion the profits of that period to be taxed at the two different rates. For example, a company with a 30 September 2023 accounting date that makes a large profit on a transaction before 31 March 2023 will pay 25% tax on 6/12 of it. If a short accounting period is ended on 31 March 2023, that large profit will all be taxed at 19%.
Capital Gains Tax
Rates and annual exempt amount
The Autumn Statement included the announcement that the annual exempt amount would be cut from £12,300 to £6,000 for 2023/24 and to £3,000 for 2024/25.
Final Words
As we wrap up our journey through the realm of tax-free allowances, it's clear that these opportunities are more than just legal ways to save money – they're strategic tools for optimising your financial landscape. By understanding the various allowances available to you and leveraging them wisely, you can minimise your tax burden while maximising your financial potential.
Remember, staying informed about tax regulations and seeking professional advice when needed can empower you to make informed decisions that align with your financial goals. Whether you're taking advantage of personal allowances, capital gains exemptions, or other tax-free perks, each step you take toward tax-efficient planning puts you on a path to a more prosperous future.
We hope this exploration of tax-free allowances has equipped you with the knowledge and confidence to navigate the intricacies of tax planning. As you continue on your financial journey, may your strategies be savvy, your savings significant, and your financial well-being secured.
Here's to a future of smart financial choices and a lighter tax load!
If you need extra advice or guidance from Accountants in Stafford, please get in touch and we will light your way.