Slash your tax bill: a guide to the top UK tax allowances and reliefs

Understand your tax allowance to minimise burden. Picture – Adobe.

There are a number of allowances which can help ease your tax burden on, understanding them is vital, writes Malik Founder and Managing Director of Tax Accountant: a Specialist Tax Consultancy

The UK tax system allows individuals to earn a certain income tax-free yearly through a personal allowance. The personal allowance for the 2023/24 tax year is £12,570. This means you don't pay any income tax on the first £12,570 you earn. In addition to the personal allowance, several other allowances can further reduce your income tax liability. Understanding these allowances is key to legally minimising your tax burden and will help filling out your self-assessment tax return.

Personal Allowance

As mentioned, the personal allowance for 2022/23 is £12,570. This means you can earn up to this before paying any income tax. The personal allowance applies to earnings from employment, self-employment, pensions, and some other income sources.

If your income exceeds £100,000, your personal allowance is reduced by £1 for every £2 earned above this threshold. Once your income reaches £125,140, your personal allowance is reduced to zero.

The personal allowance provides a significant tax break for lower and middle-income individuals. For basic rate taxpayers, it equates to tax savings of up to £2,514 per year. Even if you earn above £100,000, you still benefit from the full personal allowance on at least the first £100,000 of income.

Marriage Allowance

The Marriage Allowance allows one spouse or civil partner to transfer 10% of their personal allowance to the other. This reduces the recipient's tax bill by up to £252 per year.

To claim the Marriage Allowance, the higher earner must pay income tax at the basic rate. This means their income before allowances must be below £50,270. The lower earner's income must exceed the personal allowance threshold £12,570. Alternatively, the lower earner can earn up to £12,570 before the transfer.

Pension Contributions

Contributions to registered pension schemes attract tax relief, providing another opportunity to reduce your tax bill.

Under the net pay arrangement used by most occupational schemes, pension contributions are deducted from your salary before tax. This immediately reduces your taxable income.

For personal and stakeholder pensions under the relief at source system, your pension provider claims tax relief at the basic rate and adds this to your pot. Higher and additional rate taxpayers can claim extra relief through their tax return. There is an annual allowance for pension contributions of £60,000. Contributions exceeding the annual allowance may be subject to extra tax charges.

Savings Allowance

The Savings Allowance allows basic rate taxpayers to earn up to £1,000 per year in savings income tax-free. For higher-rate taxpayers, the allowance is £500. Additional rate taxpayers do not receive a Savings Allowance.

Savings income includes interest from banks and building society accounts, savings bonds, and peer-to-peer lending. If your savings income exceeds your Savings Allowance, you must pay income tax on the excess.

Dividend Allowance

Shareholders can earn £1,000 in dividends tax-free thanks to the Dividend Allowance. Dividends exceeding this allowance are taxed at 8.75% for basic-rate taxpayers. The tax rates are 33.75% for higher-rate taxpayers and 39.35% for additional-rate taxpayers. So, the Dividend Allowance provides a useful tax break for small portfolio investors. Just be aware that the Dividend Allowance is reduced to £1,000 for 'intermediate' rate taxpayers whose income falls between £100,000 and £125,140.

Property Allowance

Those earning small amounts from commercial property can benefit from the Property Allowance. This provides tax relief on up to £1,000 per year in gross property income.

There are some restrictions on eligibility for the Property Allowance. For example, you can't claim if the property is jointly owned or if you receive a rental income. But for small amounts of income, it can be a handy tax break.

Trading Allowance

A similar allowance exists for small-scale trading income, known as the Trading Allowance. This also provides up to £1,000 in tax relief per year.

The Trading Allowance covers any income where you are self-employed and responsible for paying National Insurance, such as consultancy work, auctioneering, and providing services like gardening or childminding.

As with the Property Allowance, there are restrictions on claiming the Trading Allowance. If you claim for the Property Allowance or earn above the VAT registration threshold, you won't be eligible for the Trading Allowance.

Rent a Room Relief

Rent a Room relief allows resident landlords to earn up to £7,500 per year tax-free from letting out furnished accommodation in their homes. You don't have to declare or pay tax on this income, provided you stay under the £7,500 threshold.

The threshold increases to £3,750 per person if you share the income with your partner. Remember that Rent a Room relief only applies if you let rooms in your main home. The relief doesn't apply to income from separate properties like holiday lets.

Tax-Free Mileage Allowances

If you drive for work, you can claim tax relief on your mileage under the approved mileage allowance payments scheme. For 2023/24, the tax-free mileage allowance is:

– Cars and vans – 45p per mile for the first 10,000 miles, then 25p per mile

– Motorcycles – 24p per mile

– Bicycles – 20p per mile

– Passenger payments – 5p per mile per passenger

Claiming mileage allowances reduces your taxable income from employment. The allowances are designed to cover the costs of fuel, insurance, maintenance, and other motoring expenses.

You need to keep detailed records of journeys to substantiate mileage claims. Apps like MileIQ can automate mileage tracking to streamline the process.

Tax-Free Childcare

The Tax-Free Childcare scheme provides a government top-up on childcare costs of up to £2,000 per child per year. This can effectively reduce your childcare costs by 20%. To qualify, you must have a child under 12 years old (or under 17 if disabled). You also need to be at work, earning at least £1,976 per year but no more than £100,000 each. This scheme is an alternative to employer-provided childcare vouchers.

Using allowances and reliefs is a legal way to reduce your tax burden. Personal allowance, pension contributions, dividend and savings allowances and mileage rates provide the most significant opportunities for tax savings. Smaller allowances like the Property, Trading and Rent Room allowances can also be useful for those with additional income streams. Claiming what you are entitled to ensure you keep more of your hard-earned money. It also encourages positive behaviours like pension contributions, energy efficiency improvements and charitable giving. A good accountant can advise you on fully utilising allowances and reliefs suitable for your financial circumstances.

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Mr Aatif Malik is Founder and Managing Director of Tax Accountant and brings over 20 years of experience advising clients on complex tax affairs. Mr. Malik's extensive knowledge spans personal tax, corporate tax, international tax, and tax disputes. For more information, visit www.taxaccountant.co.uk/about-us