Your guide to annual tax allowances
Here’s a guide to your annual tax allowances, including ISAs, pension contributions and gifts – and why it’s important to make the most of them.
At this time of year, one of the most beneficial things you can do for your money is to review your annual allowances. Make sure you’re using those that are available to you so you don’t pay more tax than necessary. The end of the tax year is on 5 April 2023 and it’s not possible to roll over most of these allowances to the following year, so if you don’t use them, you lose them.
Personal allowance: The standard personal allowance is £12,570 – the amount of income you can earn without having to pay tax on it.
Marriage allowance: If you’re married, you might be able to take advantage of the marriage tax allowance. It allows one half of a couple who earns less than the income tax threshold to transfer up to £1,260 to their higher-earning spouse – who must be a basic rate taxpayer.
Pensions: Your annual pension allowance is £40,000, although it can be lower for higher earners and where pension savings have been flexibly accessed. Any contributions you (or your employer) make receive tax relief (based on your income tax band) of 20% or more – and the money in your pension pot will grow tax free. Setting up a junior pension for your children or grandchildren could also be a tax efficient option. The fund will transfer to them when they turn 18 but they won’t be able to access the money until they’re much older. The allowance for a junior pension is £3,600 for the current tax year.
Personal savings: You’re entitled to receive some interest on your savings tax-free every year, depending on your income tax band. For non tax-payers or basic rate taxpayers, you’re allowed up to £1,000 each year; for higher rate taxpayers you get £500. If you have savings with a spouse or partner, you can each use your allowances against your joint savings.
ISAs: An ISA allows you to save or invest up to £20,000 tax free annually, whether it’s in a cash ISA or stocks and shares ISA – and also comes with the benefit of being exempt from dividend tax and capital gains tax on all growth. The lifetime ISA (LISA) can be used by first time buyers to fund a deposit for a property or taken tax-free at the age of 60. As well as paying interest, LISAs benefit from a 25% bonus from the government. The maximum you can put in each year is £4,000, which comes out of your £20,000 ISA allowance. The LISA can be opened by anyone aged 18–39, but you can keep saving into it until you are 50. You can also invest up to £9,000 in a Junior ISA (JISA) and save for your child either in a cash JISA, a stocks and shares JISA or a combination of the two.
Dividends: You are allowed to receive up to £2,000 a year in dividends, tax-free. This allowance can be particularly useful if you own shares or you’re a company owner or director.
Capital gains: Profits or gains you make on the sale of an asset – like a property where it’s not your main home and investments that are not in an ISA – are exempt from tax up to the annual allowance of £12,300. For married couples or those in civil partnerships who own joint assets, the allowance is doubled to £24,600.
Charitable donations: You can donate to charity tax-free and claim back the tax on your donation through gift aid. If you are a higher or additional income taxpayer, you can also claim back the difference to the basic rate on your gift aid donations. Just remember to keep hold of all records of your donations in order to claim tax relief when the time comes to submit your tax return.
Gifts: Gifting comes with the benefit of being exempt from inheritance tax up to an annual gift limit of £3,000 for each person you give to. Other tax-exempt gifts include money towards a wedding or a grandchild’s education. You can give a tax free gift of up to £5,000 to a child, £2,500 to a grandchild or great-grandchild or £1,000 to any other person. No inheritance tax is due if you live for seven years after making the gift to someone who is not your spouse (for example, gifting your children a property).