Want some good news? Because of measures announced in March’s budget, the amount that you can earn tax-free increased at the start of the 2021/22 tax year. However, because many allowances are frozen until 2026, which could tip thousands into a higher tax band, this ‘pay rise’ of sorts could be short-lived.
Here’s how to use some of these allowances to your advantage.
What are tax-free earnings? Each year, you’re given an allowance for certain taxes where you only have to pay tax if you exceed that allowance. This counts for various sources of income, and each has its own tax and its own allowance, which can vary depending on the income tax band you fall into.
But fear not, it’s not as complicated as it sounds. The key figures are:
£12,570 personal allowance
£2,000 dividend allowance
£6,000 savings allowance
In addition, you could qualify for other allowances such as:
£12,300 capital gains tax (CGT) allowance
£1,000 trading allowance
£1,000 property allowance
£7,500 rent-a-room scheme
Personal allowance This is the amount you can earn – whether you’re employed or self-employed – before having to pay income tax. For 2021-22, this is increasing from £12,500 to £12,570. If you live in England, Northern Ireland or Wales, your earnings will fall into these tax bands: 20 per cent basic-rate, (earnings between £12,571 and £50,270); 40 per cent higher-rate, (£50,271-£150k); 45 per cent additional-rate, (earnings of £150k+).
You’ll start to lose your personal allowance once you earn more than £100,000 – regardless of where you live in the UK. For every £2 you earn over £100k, you’ll lose £1.
Dividend allowance remains at £2,000 The tax-free amount you can earn from dividends in 2021-22 is sticking at £2,000, where it’s been for years. You might earn dividends as part of your income if you have invested in company shares, but you’ll only be taxed if you earn more than £2,000 in the same tax year. The rate you’re taxed at depends on your income tax band.
Capital gains allowance also remains, at £12,300 The capital gains allowance refers to the amount of profit you can earn from selling valuable items before having to pay tax on it. If you own assets jointly with your spouse, together you’d have £24,600 for 2021-22. If you exceed the allowance, the amount of tax you’ll pay depends on your income tax band and what you’ve sold, as property is taxed at a higher rate. Basic-rate taxpayers pay 10 per cent on assets (18 per cent on property), while higher- and additional-rate taxpayers pay 20 per cent on assets (28 per cent on property). Any losses can be offset against your gains to reduce your tax bill.
Trading allowance If you earn a small amount from things like selling items on eBay, or making items to sell on Etsy, the trading allowance could be useful. As long as this income remains below £1,000, you won’t need to inform HMRC; exceed £1,000 and you’ll need to declare it.
Property allowance You can earn up to £1,000 from your property without having to report it to HMRC. This won’t cover much of what you’d earn from renting a room –the rent-a-room scheme is a better bet – but it may be useful if you rent out your parking space, for instance, or earn a little from using your house or garden for photoshoots.
Rent-a-room scheme The rent-a-room scheme threshold is remaining at £7,500 for 2021-22. This is the amount you can earn tax-free for letting a room in your home. This only applies to the property you live in and if you earn more than this threshold, you must submit a self-assessment tax return and declare the income.
Get up to £6,000 tax-free savings interest Depending on your income, you may be able to earn up to £6,000 in savings interest before having to pay tax on it. You can do this through combining the £5,000 savings starting rate and £1,000 personal savings allowance – but only those who earn less than the personal allowance can take full advantage of this. For each £1 you earn over the £12,570 personal allowance, you’ll lose £1 from the £5,000 savings starting rate – so if you earn more than £17,570 you won’t have any of it left. However, the £1,000 personal savings allowance is available for all basic-rate taxpayers; this reduces to £500 if you pay higher-rate tax. Additional-rate taxpayers don’t receive any personal savings allowance.
Save with an ISA If the interest you earn on your savings exceeds the personal savings allowance, or you’re an additional-rate taxpayer, you could cut your tax bill with an ISA. The ISA allowance for 2021-22 is remaining at £20k, which is the total amount you can pay into one or a mix of ISAs. You’re only allowed to pay into one of each type of ISA, but you can split the allowance however you like. Be aware you can pay up to £4,000 into a lifetime ISA. All money held within an ISA remains tax-free, including interest.