Maximising Tax Allowances

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1 Personal Allowance

The Personal Allowance is the amount of income you can earn before paying Income Tax. For the 2024/25 tax year, this stands at £12,570.

Ways to Maximise Personal Allowance:

Income Shifting: If you are married or in a civil partnership and one partner earns below the threshold, transferring income-generating assets can help utilise their allowance.
Marriage Allowance: If one partner earns less than £12,570, they can transfer up to £1,260 of their allowance to their higher-earning spouse, reducing their tax bill by up to £252.

2 Dividend Allowance

The Dividend Allowance allows individuals to earn a certain amount from dividends tax-free. In the 2024/25 tax year, this allowance has been reduced to £500.

Strategies to Maximise Dividend Allowance:

Spread Investments Across Family Members: Spouses and family members can hold shares to utilise their separate allowances.
Use ISAs: Dividends earned within an Individual Savings Account (ISA) are tax-free.

3 Capital Gains Tax (CGT) Allowance

For 2024/25, the CGT annual exempt amount is £3,000 for individuals and £1,500 for trusts. This means you can make gains up to this threshold without paying tax.

Ways to Maximise CGT Allowance:

Timing Asset Sales: Spread asset sales across multiple tax years to stay within the allowance.
Transferring Assets: Assets transferred between spouses or civil partners are free from CGT, allowing the use of both allowances.
Offsetting Losses: Any losses from asset sales can be used to reduce taxable gains.

4 ISA Allowance

The ISA allowance for 2024/25 is £20,000. Savings and investments in an ISA grow tax-free, meaning no Income Tax or CGT applies to interest, dividends, or profits.

Maximisation Tips:

Utilise the Full Allowance: Contribute the maximum each tax year to benefit from tax-free growth.
Diversify Investments: Consider a mix of Cash ISAs, Stocks & Shares ISAs, and Innovative Finance ISAs to optimise returns.

5 Pension Contributions and Tax Relief

Pension contributions benefit from tax relief at an individual’s marginal rate. The Annual Allowance for pension contributions is £60,000, though tapering applies for high earners.

How to Maximise Pension Allowances:

Employer Contributions: Maximise employer pension contributions where possible.
Carry Forward Unused Allowances: Unused pension allowance from the past three years can be carried forward to boost contributions.
Self-Employed Contributions: Self-employed individuals should contribute regularly to reduce taxable income.

6 Rent-a-Room Relief

Individuals who let out a furnished room in their home can earn up to £7,500 per year tax-free under the Rent-a-Room Scheme. This allowance can be halved if shared between joint owners.

7 Trading and Property Allowances

There is a £1,000 tax-free allowance for income earned from casual trading (e.g., selling online) and a separate £1,000 property allowance for rental income.

8 Inheritance Tax (IHT) Allowances

Nil Rate Band (NRB): The IHT threshold remains at £325,000 per person.
Residence Nil Rate Band (RNRB): If passing on a main residence to direct descendants, an additional £175,000 can be applied.
Annual Gift Allowance: Individuals can gift up to £3,000 per year tax-free, with unused amounts carried forward for one year.

Conclusion

By effectively using tax allowances, individuals and businesses can legally reduce their tax burden and maximise savings. Our tax experts can help you develop a personalised tax planning strategy to ensure you take full advantage of available allowances. Contact us today for professional guidance.