It’s that time of year again – another tax year begins on 6th April 2024 and it’s important you make use of the available tax allowances before then.
This blog is updated annually with the latest guidance on allowances to help our network prepare and build an effective tax plan.
Each year, we are all entitled to various tax allowances. If you’re unsure what this means, an allowance is an amount of otherwise taxable income that you can earn each year, without paying tax on it.
You may qualify for some and not others. Even so, it’s important to know what is out there so you aren’t paying more tax than required.
If you’re employed or receive pension income, you’ll usually be taxed automatically (there may be some exceptions). If you’re self-employed, own a business, or have savings or investment income (interest), you may need to file a tax return.
In this blog, I will summarise and explain the allowances so you are aware of what you are entitled to. That way you can A) check you are being taxed correctly, B) file your tax return accurately, and C) earn and/or invest your money in a tax-efficient way.
Tax allowances based on income and/or savings:
(I’ll explain investments later)
- Personal allowance of £12,570 - Each year you can earn up to £12,570 as a salary or dividend completely tax-free, providing you have no other income. This could be earned via a salary, pension income, dividends from a business, or income from investments.
- Dividend allowance of £1,000 - On top of your personal allowance, there is an additional £1,000 tax-free dividend allowance. Again, this could be used from business income, dividends from shares held directly, or via an investment fund. This allowance is halving to £500 in tax year 2024-25, after 6 April 2024.
- Capital Gains Tax (CGT) allowance of £6,000 - You have a tax-free CGT allowance which can be used to offset gains made in the current tax year. This can be gains from a second property, investment fund, or another asset. Next tax year (2024-25), this also halves to £3,000.
- Starting rate for savings of £5,000 - You may also get up to £5,000 of interest on savings and not have to pay tax on it. This is your starting rate for savings. The more you earn from other income (for example your wages or pension), the less your starting rate for savings will be. If your other income is £17,570 or more per year, you’re not eligible for the starting rate for savings. If your other income is less than £17,570, your starting rate for savings is a maximum of £5,000. Every £1 of other income above your Personal Allowance (£12,570) reduces your starting rate for savings by £1.
- For example, if you earn £12,570 your starting rate for savings tax allowance is £5,000. If you earn £12,571, your starting rate for savings tax allowance is £4,999.
- There is a Personal Savings Allowance of £1,000 or £500 - For interest earned on savings, if you’re a basic rate taxpayer (you earn £12,571-£50,270), the first £1,000 is tax-free, if you’re a higher rate taxpayer (you earn over £50,271), the first £500 is tax-free, and if you are an additional rate taxpayer (you earn over £125,141) there is no allowance. The difference between this and the Starting rate for savings is that you can use the Personal Savings Allowance if you earn over £17,570.
- Marriage allowance - Married couples and civil partners may be entitled to claim the marriage allowance. Individuals whose income is below £12,570, and therefore doesn’t allow them to make full use of their personal allowance, may transfer this unused fraction to their spouse or civil partner, up to a set amount. For 2023-24 the maximum that can be transferred is £1,260. Individuals cannot make use of this provision if their spouse or partner pays more than the basic rate of tax.
Tax allowances for investments
As with tax allowances for income and savings, these investment allowances are lost if they’re not used. Some of the allowances have complex rules, so I’ll try and keep it simple.
- £20,000 annual ISA allowance - In order to shelter your savings and investments from income, dividend, and/or capital gain taxes, putting up to £20,000 per tax year into an ISA account will ensure it continues to grow tax-free. You aren’t taxed on ISAs but can only invest £20,000 a year into them.
- £4,000 LISA allowance - An allowance that’s not used as often is the Lifetime ISA. This uses a portion of your £20,000 allowance mentioned above, but investments will receive a 25% bonus from the government. However, these accounts have to be used for a first house purchase or for retirement, otherwise, penalties will apply.
- £60,000 annual Pension allowance (subject to earnings and carry-forward) - Each year you can invest 100% of relevant UK earnings, up to £60,000 into a private pension. This is again a valuable tax shelter as the investments will continue to grow tax-free and you’ll get tax relief at your rate of income tax on the initial investment.
- For example, if you invest £10,000 into your pension and you are a basic-rate taxpayer, you will get tax relief which would make the total amount £12,500. This will be credited to your pension pot.
- The rules can get complex, however, if you’re earning a high income (over £200k) or if you’re adding more than £60,000. If this is you, and you’d like to know more, get in touch and we can help.
When saving for retirement or even saving generally for the medium to long term, it’s worth making use of these investment allowances as much as you’re able. ISAs and Pensions represent the two most effective and tax-efficient savings vehicles.
We would always recommend speaking to us here at Stephen Eve to ensure you’re using the allowances correctly and to avoid any adverse tax charges. If you’re self-employed, or if you complete an annual tax return, it would also be advisable to speak to your Accountant. We work alongside many Accountants so are always happy to collaborate with or recommend them.
This content is for information purposes and should not be treated as financial advice. We would always recommend speaking to a professional before making decisions regarding your wealth. .
The value of investments can fall as well as rise and you may not get back the amount originally invested. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. Even a long-term investment approach cannot guarantee a profit.
Tax treatment varies according to individual circumstances and is subject to change. Please note that the FCA does not regulate will writing, tax planning and trusts.