Your own tax treatment will depend on your personal circumstances — and remember that tax rules change regularly.
As the old saying goes, nothing in life is certain except death and taxes.
And tax can be tricky to wrap your head around — perhaps that’s why thousands of people across the UK are actually paying too much of it every year.
While we all have to legally pay a certain amount of tax on any income we receive each year, many of us don’t know the ins and outs of how much we should be paying, or how much we’re entitled to save from the taxman. Cue lots of headaches when it comes to tax year end.
The good news is that you don’t have to pay tax on all of your taxable income. There are several allowances available which can help you keep more of your earnings in your own pocket.
To make things simple, here’s a handy rundown of all the allowances you might be entitled to this year.
Your personal allowance
Let’s start with the simpler ones. For the 2019/20 tax year, everyone is entitled to earn up to £12,500 tax-free (up from £11,850 in 2018/19). This is your personal allowance.
Your tax rate on anything above this will then depend on how much you’re earning — anyone earning between £12,500 and £50,000 will pay basic rate income tax of 20%. For higher earners (above £50,000) your tax rate will be 40%, and for top rate taxpayers (above £150,000) your tax rate will be 45%.
If you earn over £100,000 a year, your personal allowance will be reduced by £1 for every £2 you’re over this threshold. So if you earn anything above £125,000, you won’t have a personal allowance — all of your income will be taxed.
For anyone living in Scotland, things are a little different. Anyone earning above £43,430 will pay a higher rate tax of 41%, and top rate taxpayers (£150,000 or more) will pay 46% tax on their income.
Personal savings and dividends
You’ll be able to save a little on anything you have tucked away, too, through a limited amount of tax-free interest. Basic rate taxpayers can earn up to £1,000 in tax-free savings interest, while for higher rate taxpayers it’s £500.
Unfortunately, if you’re lucky enough to earn over £150,000, you won’t qualify for the personal savings band.
For any dividends you receive, the first £2,000 will be tax-free.
Starting rate band for low earners
Additional tax relief is available for low earners. The 0% starting rate band for savings means those who are eligible can have up to £5,000 in tax-free savings interest as well.
It essentially means anyone with a total taxable income of less than £18,500 for the tax year 2019/20 won’t be taxed on their savings.
E.g. Personal allowance (£12,500) + personal savings allowance (£1,000) + starting rate band (£5,000) = £18,500.
Once you’ve used up all of your personal allowances, you’ll have to pay income tax on the rest of your earnings — unless you’re eligible for one or more of the following.
- Marriage allowance: anyone that’s married or in a civil partnership can benefit from transferable tax allowances. Providing one of you falls within the basic rate tax band, and the other has not used up their full personal allowance for the year (i.e a non-taxpayer) up to £1,250 of the remaining allowance can be transferred to your spouse and vice versa.
- Trading and property allowance: if you make any money from trading — like buying and selling things online — you’ll be able to keep the first £1,000 you earn tax-free.
For anything you earn on commercial land or property — e.g. if you rent out a space for a short period of time — the first £1,000 is also tax-free. If you’re renting out a furnished room within your own home though, you can claim rent-a-room relief of up to £7,500 each year.
If you’re a landlord, you’ll have different tax rules to follow.
- Blind person allowance: if you’re registered blind or have severely impaired sight, your personal tax allowance is increased. If your spouse or civil partner is also eligible, you’ll both get the additional allowance. For the 2019/20 year, the blind person allowance is £2,450. This is on top of your personal allowance of £12,500 per year, bringing your total to £14,950.
While no one wants to pay any more tax than is necessary, it’s equally important to make sure you don’t fall foul of the rules, either.
If you still feel a little confused when you go to file your tax return, check back in for a quick refresher!