When it comes to tax, no one likes paying too much. Thankfully, there are plenty of allowances you can use so that as much of your money as possible can grow tax-free
Most of these expire at the end of each tax year, so it pays to be organised. If you set aside a bit of spare time in March, you can check your money is working as hard as it can for you.
That’s because April 5th sees the end of the tax year—it's the last date you can make the most of your allowances for the 2018-19 financial year.
If you want to make a final pension contribution for this current financial year, open or add to a tax-free savings account, or make a gift, you need to do it soon.
Factor in your personal allowance
Everyone over 18 has a Personal Allowance. This is the income you can earn each financial year (April 6th 2018 to April 5th 2019) before you pay Income Tax.
This year the allowance per person is £11,850. This is the amount of income that you don’t have to pay tax on.
Once your income passes this threshold, the amount of tax you pay will depend on your total annual income. Income is taxed in bands, meaning you have lower your taxable income or no tax or be a basic rate, higher rate, or additional rate taxpayer.
The basic rate of tax covers earnings from £11,851 to £46,350 inclusive. Any income within this band will be taxed at 20%.
Higher rate tax kicks in at £46,351 and covers income up to £150,000. These earnings will be taxed at 40%.
You may be liable to pay additional rate tax, at 45%, for earnings above £150,000.
If you are a married couple and one of you will not be using up the whole of their £11,850 personal allowance, you are able to transfer 10% of it to your spouse. This would be helpful if, for example, one half of the couple wasn’t earning but the other was a higher rate taxpayer.
Depending on your income, you potentially have tax free allowances for:
Savings Interest: You can use your Personal Allowance to earn interest tax-free if you have not used it up on your wages, pension or other income. You may also get up to £5,000 of interest tax-free. This is your starting allowance for savings but it is reduced in line with other income, so you will have a smaller allowance if you earn more.
Find out more here
Dividends: You may get a dividend payment if you own shares in a company. You only pay tax on dividends that go above your dividend allowance in the tax year.
Bear in mind that this year (2018-19) the dividend allowance has been more than halved from £5,000 in the previous year to just £2,000 in this current tax year.
The tax you pay on dividends over the £2,000 depends on which tax band you are in. For basic rate taxpayers, the rate on dividends over your allowance is 7.5% but it jumps to 32.5% for higher rate taxpayers.
Self-employment: your first £1,000 of income from self-employment is your ‘trading allowance’
Property: your first £1,000 of income from property you rent, unless you are using the Rent a Room scheme.
You pay tax on any interest, dividends or income over your allowances. How much you depend depends on which tax band you are in.
Individual Savings Accounts
Each adult is allowed to save up to £20,000 in the 2018-19 tax year, in an Individual Savings Account (ISA). If you don’t use all of this allowance in one year you can’t carry it forward, so if you do have spare cash now is the time to make your final contribution.
The maximum that you can contribute per annum to the new Lifetime ISA is £4,000 and this is part of the overall £20,000 ISA limit. The Lifetime ISA was launched in April 2017 in order to help younger people buy their first house and/or save for retirement.
Capital Gains Tax
Capital Gains Tax is paid when you sell an asset that had increased in value—like a rental property or shares in the stock market. You don’t have to pay CGT on the sale of your own home, even if it has increased in value. However, any second home, investment house or flat, or holiday home that is sold at a profit, will be liable for CGT.
In the current tax year you can make a capital gain of £11,700 per person without paying tax. Gains above this threshold are taxed at 10% for basic rate taxpayers and 20% for higher rate taxpayers.
You are allowed to make pension contributions of up to 100% of your earnings or a £40,000 annual allowance, whichever is lower, without having to pay income tax, if you are a UK taxpayer. You can also carry forward unused allowances from the previous three tax years if you have any spare money.
However, there are restrictions on how much you can save in your total pension fund without having to pay extra tax. This restriction is known as the Lifetime Allowance. The lifetime allowance for most people is £1,030,000 in the tax year 2018-19.
It applies to the total of all the pensions you have, including the value of pensions promised through any defined benefit schemes you belong to, but excluding your State Pension.
Gifts and inheritance tax
Within each financial year you can make as many individual gifts of £250 as you wish, up to a total of £3,000. You can also make tax-free wedding gifts of up to £5,000 for a child, £2,500 for a grandchild and £1,000 to anyone else without it being counted as part of your estate for inheritance tax purposes.
Married couples and civil partners are allowed to pass their estate to their spouse when they die without having any tax liability or having to pay Inheritance Tax (IHT). In other words, the surviving spouse can inherit the entire estate without having to pay IHT.
If they were both to die, their estate might become liable to Inheritance Tax (IHT), depending on the total value of the estate. IHT is payable on estates worth more than £325,00 for an individual, or £650,000 for a couple.
A new allowance, currently being phased in, enables people to pass on the value of the family home when they die, as well as assets they might own.
It is known as the additional “main residence allowance” and can only be claimed if the house is passed on to children or grandchildren.
The allowance is being phased in stages each year until the tax year 2020 - 2021, when it will be worth £175,000 for an individual and £350,000 for a couple. When added to the £650,000 total IHT allowance for a couple, this means that assets and the family home to the value of £1 million could be passed onto family members without the beneficiaries having to pay any IHT. For this current tax year, the allowance is worth £125,000 per person if their main residence is passed onto a direct descendant, such as one of their children, rising to £150,000 person in the tax year 2019-20.
More help and information
The Money Advice Service website explains in detail what you need to know about income tax and National Insurance.
Inheritance tax is explained in detail on the government’s own website.