As a UK taxpayer, you only need to pay income tax on income that is outside your tax allowances. There are several types of allowance that enable you, if you are eligible for them, to lower your tax bill. They work either by reducing your taxable income so that your tax is calculated on a lower figure, or by providing a tax credit, that reduces the amount of income tax you are required to pay.
You can be eligible for UK tax allowances if you are a taxpayer who is resident and domiciled in the UK (including Wales and Scotland). It is crucial to keep clear financial records to ascertain which allowances apply to you. This includes filing all payslips and evidence of self-employed income, as well as bank statements and details of expenses that can be claimed back for tax purposes using receipt capture software.
There are various categories of allowances when it comes to tax – here are four important ones to consider.
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Personal allowance
Your personal allowance reduces the amount of income tax you pay on your earnings by allowing you a certain part of your earnings to be exempt from tax. For the current tax year (2019/20), the threshold has been set for most people at £12,500. How much tax you pay on income above that amount will depend upon which tax band, or bands your earnings are in. A tax advisor or accountant can help you calculate what you are likely to have to pay. People born before 6 April 1948 may qualify for a larger personal allowance – again, you will need to check with an expert to see if and how this affects you.
Blind person’s allowance
As the name suggests, this is an allowance that you can claim if you are visually impaired. Eligibility relies on either being registered blind with a local authority in England or Wales, or have such bad sight that you cannot carry out any work for which eyesight is essential for Scotland or Northern Ireland. The 2019/20 Blind Person’s Allowance is £2,450 and you can claim to transfer any you do not use (for example if you don’t have enough income to use it) to a spouse or civil partner.
Marriage Allowance
This allowance is available to married spouses and civil partners. It enables one person in the couple who is not liable for paying income tax at any rate higher than the basic rate to transfer £1,250 of their personal allowance to the other party. The recipient also cannot be paying income tax above the basic tax rate. The maximum tax saving that a couple can claim for from this allowance in a single tax year is £250 and this is granted via a tax credit that can be off-set against the recipient’s tax liability.
Check the Government’s website for further details and conditions, and how separating or getting divorced will affect things.
Trading Allowances
Sole traders with an income of less than £1,000 per year do not need to register for self-assessment with HMRC or pay tax on these earnings. However, if you are earning more than £1,000 from sole trading, or causal services such as babysitting or gardening, you can either use your business capital and expenses figures to help off-set your tax bill, or you can claim a trading allowance of up to £1,000 to do the same job – you can’t use both. This does not apply to any trading income from a partnership.
Property Allowance
This entitles individuals to a tax-free allowance of up to £1,000 for income generated by land or property, such as rent. For cases where land or property is jointly owned by two or more people, each person is eligible for the £1000 allowance against their personal share of the gross income. This does not apply to the Rent a Room scheme for letting out a room in your home.