Last Updated on 14 December 2022 by Dan
Hello everyone! The tax system here in the UK can be pretty complicated in parts, but features a significant number of allowances that people can take advantage of – I thought I’d run through these today as being aware of them and structuring you finances towards them can provide a real boost.
All of these are purposefully designed into the UK tax system by the Government in order to try and incentivise particular behaviours seen as positive or provide other net gains, like saving, investing or giving to charity.
And for avoidance of doubt we’re strictly talking here what are legal allowances, and trying to stretch the intention of any of these is not a good idea. Not declaring or being dishonest about your financial affairs is tax evasion – illegal and a serious criminal offence.
Important: This obviously isn’t official UK tax advice, and as ever you should always do your own further research before engaging in any activity, and consult a reputable tax adviser if you have questions or want official advice tailored to you. See our disclaimers for more.
The Government’s tax advice online is also a little dry, but an extremely good source of information – I’ll provide links to each relevant page below.
Please note this article was originally written based on the 2021/22 tax year, and then we’ve updated where possible. For avoidance of doubt, if we make reference to per year or per annum it refers to the tax year, not the calendar year.
Important note: As per our Disclaimers, please note we try to ensure that all information on The Financial Wilderness is as accurate and up to date as possible, but you should do your own research before making any decisions – particularly as tax rules change all the time. The below is not financial advice and if in any doubt about financial actions, you should contact a regulated and reputable financial advisor.
What is the Personal Savings Tax Allowance?
The Personal Savings Allowance is designed to incentivise savings within your bank account.
If you’re a basic rate income taxpayer, this allows you to earn up to £1,000 of interest on your savings without paying tax on it. With savings rates where they are the moment, I suspect most people may struggle to maximise this one!
If you’re a higher rate income taxpayer your relief is limited to £500, and if you’re an additional rate income taxpayer there’s no relief at all.
For more, see “Personal Savings Allowance” on the Government’s “Tax on savings interest” page.
What is an ISA allowance?
An ISA is effectively a “tax wrapper” that lets you make £20,000 of investments or savings each year which will not be subject to taxes on the interest or capital gains, and is well worth taking advantage of.
It’s only available in the UK, although other countries do sometimes have similar tax wrappers.
ISA’s are a little more complex and there’s a variety of ways you can use them – instead of covering them here I’ve written a full guide on why you should make use of an ISA and the options available to you here.
What is a Junior ISA?
If you’re a parent, you can also get a £9k tax allowance per year when either saving or investing for your children. You can have a Junior ISA for your child as well as an ISA for yourself.
A junior ISA is a nice option when investing for children as you would hope to see significant capital gains in the longer term. The disadvantage with this option is that money is locked away until the child is 18, except in exceptional circumstances.
If you’re looking to simply save, the earnings rates on junior savings accounts are pretty good and don’t come with the same “lock away until 18” restriction, so something to consider.
You can take up a Junior ISA though most banks and investment firms – and don’t forget you can read our article on “how to invest for your child” right here for all the different things you can do you get them on the right track!
The Government page on Junior ISA’s can be found here.
What are Trading and Property Tax Allowances?
If you have a small side business, you have a £1,000 allowance per annum for any income associated with this. Even with a small business, it’s always best to keep records to show your figures and that this is your intention.
You also get a second allowance of £1,000 if you use your property for any reason to generate income (rent, allowing filming etc.)
If you’re within the allowance, you don’t need to let HMRC know or declare this income.
If you go beyond this figure and you’re acting as a sole trader (I.E you haven’t set up a company) you’ll need to register for self-assessment and declare your income there, where HMRC will tell you what additional tax you owe – essentially based on your rate of income tax.
Government guidance on both the trading and property tax free allowances can be found here.
What is the Capital Gains Tax Allowance?
If you’re a UK investor who is not investing through an ISA (and see above on why you should do this if you can) you’ll receive a further allowance for any capital gains made on an investment.
At present the allowance is £12,300 worth of gains, however unfortunately this will drop to £6,000 in the 23/24 tax year, and £3,000 in the 24/25 tax year.
A capital gain is simply the different between the buying price and the selling price – which you’re obviously hoping will be positive when you’re investing! For avoidance of doubt something only becomes a capital gain at the point you actually sell it, not during the life of the investment.
Beyond this figure you’ll need to declare your gains via self-assessment, and pay tax which will depend on your income tax bracket.
Government guidance on the Capital Gains Tax Allowance can be found here.
What is the Dividend Tax Allowance?
Another potential gain that may be made in you’re an investor in shares is the possibility that you may receive dividends (a payment made when a company distributes some of it’s profits to the shareholders of the company).
Right now, you’re allowed to receive £2,000 per year of those dividends without paying tax. Again rather unfortunately this will drop to £1,000 in the 23/24 tax year, and £500 in the 24/45 tax year.
Beyond this figure you’ll need to declare your gains via self-assessment, and pay tax which will depend on your income tax bracket.
The Government’s guidance on the Dividend Tax Allowance can be found here.
What is Gift Aid and Give as you Earn?
In order to try and promote giving to charity the Government will provide tax relief on any charitable donations you make.
If you’re a basic rate taxpayer this simply happens at the point you make the donation – you’ll mark yourself as paying gift aid on the form and the relief is effectively additive to what you give to the charity.
If you’re a higher or additional rate UK taxpayer, you can also claim some additional relief on the donation, as the relief is at your income tax rate. To do this you’ll need to complete self-assessment, and there’s a section where you simply declare your total donations.
Another option is to use Give as your Earn if you employer allows it, which simply takes your giving off your regular salary, so you never pay the income tax on it in the first place. We wrote about Give as you Earn here.
We strongly encourage charitable giving – we think it really is a good thing. We’ve also written about how you can get gift aid on physical donations.
What is the Single Occupancy Council Tax Discount?
If you live solo and are in England or Wales, you can get a 25% discount on your council tax for the year!
To claim it you need to get in touch with your local council, but the methods vary (often you can submit a form via the council’s website, and they’ll make the appropriate adjustment to the tax you’re paying).
Even better, if you’ve been living alone for a while and didn’t realise you could claim this, you can generally get it backdated six months – just let the council know the date you started living along.
Got any more?
If you think you’ve got a good one which we’ve missed we’d love to hear about it! Just let us know in the comments below.
Equally if you have any questions on these, let us know in the comments and we’ll come back to you!
And that’s it!
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I’ve learned something new here! I wasn’t aware that (For Side Hustlers: The Trading and Property Tax Allowance) it was £1000 twice!
Wonder if I’m the only one not in the know.
Well presented piece and quite easy to follow, which is rare sometimes on some blogs.
Thank you so much, I really appreciate the lovely comment!
Great article on legally reducing taxes in the UK! I appreciate the comprehensive overview of the different tax-saving strategies and the explanations of how they work. The tips on pension contributions and ISA investments are very useful, as they demonstrate how to make the most of tax-advantaged accounts. I also liked the emphasis on keeping accurate records and seeking professional advice, as it’s important to ensure that all tax-saving efforts are done in compliance with the law. It is also good to be aware of the government’s tax policies and any changes that may happen.
Overall, this is a valuable resource for anyone looking for ways to legally reduce their tax burden in the UK and the advice on where to seek help is also very important.