Many self-employed individuals, landlords, and other taxpayers may overpay their taxes due to overlooking available personal tax allowances. This can occur because they are unaware of these allowances or lack information about claiming them, leading to missed opportunities for tax savings.
Understanding personal tax allowances is crucial for every UK taxpayer. These allowances reduce your taxable income, potentially lowering your tax bill. This blog unravels everything you need to know about UK personal tax allowances.
What are Personal Tax Allowances?
Personal tax allowances refer to specific amounts of income that individuals can earn or receive without being subject to taxation. In the UK, taxpayers can access various types of personal tax allowances designed to minimize their tax liabilities.
WHO CAN CLAIM PERSONAL TAX ALLOWANCES?
Certain personal tax allowances are accessible to all UK taxpayers, but others are contingent upon factors such as income level and individual circumstances. Sole traders and landlords in the UK have the potential to access most of the primary personal tax allowances, depending on their specific income and personal situation.
1. PERSONAL ALLOWANCE
The Personal Allowance serves as a threshold for Income Tax liability with HMRC, applicable to both employed and self-employed individuals. In the 2024/25 tax year, the standard annual Personal Allowance stands at £12,570. However, this allowance decreases by £1 for every £2 of income earned above £100,000. If your taxable income exceeds £125,140, you no longer qualify for the Personal Allowance.
2. TRADING ALLOWANCE
The Trading Allowance presents a tax exemption of up to £1,000 annually for individuals earning income from self-employment, including occasional casual work such as decorating, gardening, baking, car repairs, or teaching music. However, this allowance does not apply to those earning trading income from a company they own or control, nor from their employer or their spouse’s/civil partner’s employer. Additionally, ordinary partnership members are ineligible for the Trading Allowance.
It’s important to note that if you claim the Trading Allowance, you cannot deduct allowable expenses for your sole trader business purchases. Therefore, if your business expenses exceed £1,000 in a tax year, it’s more advantageous to claim them through your Self-Assessment tax return and forgo claiming the Trading Allowance.
3. PROPERTY ALLOWANCE
The Property Allowance presents a valuable opportunity for landlords, offering a yearly tax exemption of £1,000 for taxable income derived from rented land or property. This allowance extends to all co-owners of a property, allowing each individual to claim the £1,000 exemption against their share of rental income. Moreover, if you engage in both self-employment and property rental, you are eligible to claim both the Trading Allowance and the Property Allowance, maximizing your tax benefits.
4. DIVIDEND ALLOWANCE
When you receive dividends from company shares, it’s essential to consider their tax implications. For the 2024/25 tax year, you can benefit from the tax-free Dividend Allowance of £500. This means you’ll only be taxed on dividend payments exceeding £500, given that your other taxable income surpasses the Personal Allowance of £12,570 in the same tax year.
5. MARRIAGE ALLOWANCE
If you’re married or in a civil partnership and your income falls below the standard Personal Allowance threshold (£12,570 annually), you might qualify for the Marriage Allowance. This provision enables you to transfer £1,260 of your unused Personal Allowance to your spouse or civil partner, potentially lowering their tax burden by up to £250 in the tax year. It’s important to note that the Marriage Allowance is exclusive to married couples and those in civil partnerships; doesn’t apply to unmarried couples living together.
Bonus Tip: If you’re unsure about how to optimize your use of the Personal Tax Allowance or have complex tax affairs, consider consulting with a tax advisor or accountant for personalized advice.
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