Quick guide into the UK most common tax allowances

2021/22 TAX Allowances UK, England

How to maximise personal tax

I try to maximise my personal tax every year. I utilise 7 out of 8 allowances described below.

Tens of thousands of pounds available to residents of England in tax-free allowances. HMRC website is incredibly helpful and is easy to read, but not so easy to navigate to find the exact type of tax you need to pay. I could not locate one single summary page listing all the available allowances.

I created a summary of most common tax allowances (with links back to HMRC) utilised by an average person. There are a few more allowances which exist. Furnished holiday lettings, foreign income, marriage allowance, Junior ISA and few more. Those extra allowances are not covered in this review. I did not cover pension contributions either, as they need a separate post.

Most useful Allowances

£12,500 personal allowance (changes after you reach £100k)

£2,000 dividend allowance

£12,300 Capital Gain allowance

£20,000 ISA allowance

£1,000/£500 Personal savings allowance (changes with tax band, additional rate earners don't get this allowance)

£6,000 Capital Gains Tax on personal possessions

£7,500 Rent a Room Scheme

£1,000 The trading allowance

Some people may utilise more allowances depending on individual circumstances.

Personal Allowance

In my case, this allowance is utilised via PAYE. It is taken into account by my employer when calculating my salary.

The general rules are — you do not pay any tax for first £12,500 earned. This is called Personal Allowance. For Higher rate earners this rule changes. It has been confirmed that from 2021 the Personal Allowance will be increased to £12,570.

Dividend Allowance

You also get a dividend allowance each year. You only pay tax on any dividend income above the dividend allowance. Currently, the Dividend allowance is £2,000 despite personal tax band.

I utilise this allowance for my dividend stock income. Quick example, on average, S&P 500 stocks yield 1.7% annually. Say you found a good one with a 4% return. To actually reach your 2k dividend allowance you should have 50k invested in that stock.

Read more Dividend Allowance here.

Capital Gain Allowance

Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value.

You only have to pay Capital Gains Tax on your overall gains above your tax-free allowance (called the Annual Exempt Amount).

The Capital Gains tax-free allowance is £12,300.

It’s the gain you make that’s taxed, not the amount of money you receive.

For me, this allowance comes handy when I do short term investing via Trading212 app. I buy, hold and sell stocks, collecting the gains. My average profit is £100-£200 over a period of a couple of months. In my case, £12,300 is a huge allowance.

Read more on Capital Gain Allowance here.

ISA Allowance

In the 2020 to 2021 tax year, the maximum TOTAL you can save in ISAs is £20,000. So far, there is no sign this will change.

There are 4 types of ISA:

• cash ISAs
• stocks and shares ISAs
• innovative finance ISAs
• Lifetime ISAs (this

You can put money into one of each kind of ISA each tax year. But, the total cumulative ISA tax-free amount is capped at £20k.

This is the most important one for me. I have a Vanguard Stock and Shares ISA, where I am saving money for my early retirement.

Read more on ISA Allowance here.

Personal Savings Allowance

You may also get up to £1,000 of interest and not have to pay tax on it, depending on which Income Tax band you’re in. This is your Personal Savings Allowance.

To work out your tax band, add all the interest you’ve received to your other income.

I did use this allowance every single year till 2019. With current saving rates, I see no point to deposit money into a savings account.

Read more on Personal Savings Allowance here.

Other Allowances

1. Capital Gains Tax on personal possessions — You do not need to pay tax on personal possessions you sold for less than £6,000.

I do sell personal possessions on eBay and Facebook. Anything from Lego sets to the old TV. I do it twice a year — November/December and March/April. The first time around it surprised me, how much money I got for items I was planning to recycle. I earn on average around £1,000 a year in possession sales.

2. If you rent furnished accommodation in your main home, you can use the Rent a Room Scheme. You’ll be automatically entitled to:

• £7,500 of tax-free property income if you do not share this income
• £3,750 of tax-free property income if you share this income with other people

I have not used this allowance. My friends rent a room and pay a vast part of their mortgage via doing so.

You cannot deduct allowable expenses under Rent a Room Scheme.

3. Tax-free allowances on property and trading income — The trading allowance is a tax exemption of up to £1,000 a year for individuals with trading income from:

• self-employment
• casual services, for example, babysitting or gardening (helpsheet 325 has more information about other taxable income)
• hiring personal equipment, for example, power tools

I provide casual consulting services to different organisations. You can read how I do it in my article, hence this allowance comes very handy!

The above information was compiled using the HMRC website as of 08 February 2021. The HMRC can change their tax allowances at any time. Please always check before making any financial decisions.

Ludi F