Guide to Tax-free allowances 2022/2023

Tax allowances can be an important yet complex area to understand when navigating your family or business finances. Here’s our comprehensive guide to the ins and outs of tax-free income and expenditure in the UK.

Remember, if you are an existing Redwood Client on a Service Level Plan, we will not charge you to use up your allowances. New funds placed into your portfolio through your ISA or pension are free from any initial Redwood Financial fees.

Personal Allowance

Your personal tax allowance is the amount of income you can earn or receive every tax year without paying tax. Currently, in the UK, the standard tax-free Personal Allowance stands at £12,570; only once your income exceeds this amount will you be liable for tax.

It’s an allowance that applies to everyone, including students. When this threshold is reached, you will pay the standard tax rate of 20% on your income or earnings up to £50,270. After this, a higher tax rate will apply, as illustrated below:

*Please note these income tax thresholds apply to 2022/3. The amounts detailed above differ for Scotland.

If you aren’t earning enough to fulfil your Personal Allowance, you could release some money from your investments to use up this allowance and potentially not pay tax on that money.

High earners take note:
If your net income exceeds £100,000, your allowance will be reduced. For every £2 that your adjusted net income is over £100,000, your personal allowance will reduce by £1. Therefore, were you to earn £125,140 or more, your allowance would be nil. For this reason, anyone earning over £100,000 must file a self-assessment tax return with HM Revenue and Customs (HMRC).

ISA Allowance

Everyone has an allowance of £20,000 to invest in an ISA for the 2022/23 tax year. It may be sensible to consider whether other less tax-efficient investments could be encashed to generate funds to use this allowance in full; speak to us to find out more.

Remember that this allowance is the maximum allowed per tax year across all the ISA products you have and does not relate to each individual fund.

Redwood clients can transfer any Cash ISA into a Stocks & Shares ISA inside their existing True Potential Portfolio for free with our Direct Offer Service, simply submit your details via our website contact form and request an ISA Transfer Form.

Personal Savings Allowance

Do you enjoy a savings income? Another allowance is the Personal Savings Allowance, which enables you to avoid paying income tax on the interest earned by your savings. Not unlike the Personal Allowance, it is a tiered system tied to how much you earn:

• If you’re a basic rate taxpayer earning up to £50,270, you need not pay income tax on the first £1,000 of interest your savings generate.
• If you’re a higher rate taxpayer earning £50,271 to £150,000, you need not pay income tax on the first £500 of interest your savings generate.
• If you earn more than £150,000, you will receive no personal savings allowance and will be taxed on all savings interest.

Marriage Allowance

Marriage Allowance enables you to offset one partner’s earnings with the other’s to pay less tax. It is only of benefit when one spouse or civil partner has an annual income below the Personal Allowance tax threshold of £12,570. Once you’ve applied, Marriage Allowance will be automatically applied each year – you must cancel it should your income or relationship status change.

How does it work?

A typical scenario involves one partner working part-time or more flexibly, due to childcare responsibilities, earning less than the £12,570 tax threshold in a tax year. Let’s say the part-time worker earns £11,000, but their spouse or civil partner earns £24,000 working full-time and is, therefore, due to pay tax on the £11,430 over the tax-free earnings threshold.

By claiming Marriage Allowance, the part-time worker can transfer up to £1,260 of their Personal Allowance to their partner. This situation would result in the part-time worker having a Personal Allowance of £12,260 – still below the tax threshold – while the partner gets a ‘tax credit’ on the £1,260.

In this scenario, the couple would stand to save £252 due to reducing their taxable income from £11,430 to £10,170. Had the part-time worker earned a little more and gone over their Personal Allowance threshold by claiming Marriage Allowance, they would only be taxed at the standard 20% rate on the amount that exceeded the £12,570 Personal Allowance.

You can still make a marriage allowance claim if one spouse is not working.

However, it’s worth noting that the partner in employment must earn less than £50,270, and only a maximum of 10% (£1,260) of the non-working individual’s Personal Allowance can be transferred.

How to qualify for marriage tax allowance

You simply need to be married or in a civil partnership and basic rate taxpayers to apply for marriage tax allowance. Unmarried couples living together do not qualify. Additionally:

• One of you needs to earn less than the £12,570 Personal Allowance.
• The higher-earning partner needs to earn less than £50,270 (or £43,662 for those living in Scotland), i.e., pay tax at the basic rate of 20%.
• You both have a birthdate after (or on) 6 April 1935. This is because there’s a different tax break called Married Couple’s Allowance, which applies to elderly couples born before this date. See www.gov.uk for full details of Married Couple’s Allowance.

Additional marriage perks

There are instances when you can benefit from tax perks relating to being married. These include:

• When a higher rate taxpayer ‘gifts’ assets to their spouse or civil partner to not be liable for the tax. This is a viable means of reducing capital gains tax. Find out more here. Alternatively, couples may choose to jointly held assets to use each person’s capital gains tax allowance of £12,300 upon selling.
• Avoiding inheritance tax on the death of a partner – husbands, wives or civil partners do not pay tax on money or property left to them by their spouse.
• Some pensions will transfer to the partner’s spouse in the event of their death.

Gifting

There are a number of gifting allowances that may be beneficial for Inheritance Tax purposes. A UK taxpayer can give away £3,000 worth of gifts each tax year using their annual tax exemption. There are, however, a number of rules relating to gifts bestowed less than 7 years before death which are very important to note.

Visit the HMRC website for more information to find out more: https://www.gov.uk/inheritance-tax/gifts

Self-employed allowances

If you’re self-employed, you’re required to keep records of your income and outgoings. By also logging your expenses and retaining evidence of your spending in relation to your business, you’ll be able to claim all the tax relief you’re eligible for via your tax return. The same Personal Allowance of £12,570 applies to those in self-employment.

Avoid a hefty, unforeseen tax bill by fully utilising the tax-deductible expenses available to you, including:

• Business set up costs including website costs, equipment and office furniture
• Office consumables – relating to the running of your office, printing cartridges or stationery, for example
• Equipment expenses -a laptop or specialist machinery, for example
• Travel costs – journeys must be outside of travelling to and from your usual place of work
• Clothing costs – outlay on uniforms or specific attire needed for the job
• Staff or subcontractor costs – monthly salaries, for example
• Raw materials bought and sold on
• Costs connected to your business premises – heating, water, phone bills. If you work from your home you can claim a proportion of these costs
• Costs to market your business
• Training when directly associated with and of benefit to your enterprise
• Banking or insurance costs associated with your business
• Accountancy and legal fees if wholly attributable to the business

You cannot claim allowable expenses in addition to the £1,000 tax-free trading allowance, so it will depend on the scale of your expenses as to which is most beneficial to claim.

In some instances, you can use simplified expenses; see gov.uk for further details and exemptions.

Limited Company allowances

If you run a limited company, your tax affairs are likely to be a little more complex than those of a sole trader.

There are some notable additions to the above allowable expenses, including:

• health checks and eye tests
• gifts and trivial benefits for employees of £50 or less
• annual staff parties costing less than £150 per person
• pensions
• charitable donations

Limited companies pay corporation tax at a rate of 19% instead of income tax and National Insurance.

As company directors are technically employees of their own company, they need to pay National Insurance contributions on salary payments above the primary threshold of £9,880 but not on dividend income.

For this reason, the most tax-efficient way for company directors to pay themselves is via a small salary and the use of dividends. In 2022/3, there is a separate Dividend Allowance of £2,000, and dividends are taxed in bands in accordance with your income. Further guidance is available at gov.uk

Tax allowances for Teachers

Most expenses and mileage incurred by teachers is considered routine and non-tax-deductible. However, there are some exceptions, including:

• Professional membership fees required for the role (Teaching Union fees)
• Annual subscriptions to approved professional bodies relevant to the role
• Teaching materials like textbooks
• Working from home regularly (due to Covid-19, for example), whereby utility and phone costs may be eligible for tax relief
• Uniforms or specialist clothing (such as a replacement PE kit) are needed for your job and the cleaning of this clothing
• Safety apparel (not PPE) required for the role – particularly relevant to science and design technology teachers
• Mileage for travel to and from work when it is not the usual place of work (particularly relevant for peripatetic teachers; by contrast, supply teachers’ work is deemed to start once on the premises)
• Travel and overnight expenses incurred when you have to travel away for work
• Buying ‘substantial’ equipment for work (i.e. specialist sports equipment) unless it will have dual personal use.

There are some important caveats to note; to avoid rejected requests, HMRC advises teachers to consider whether an item is ‘wholly, exclusively and necessary’ to the performance of their duties.

As stated by HMRC, ‘the critical question is whether another teacher could carry out the duties with what the employer provides.’ Also, you can only claim for new replacements, not for the initial purchase.

Property tax-free allowances

If you have a property that you use to generate income for holiday lets or rent, you can take advantage of a £1,000 tax-free allowance in each tax year. This is wholly separate from a trading income allowance; if you have both income types, you stand to get the benefit from both.

There are some rules to note. For example, you cannot utilise the property allowance if you’re generating income from letting a room in your own home under the Rent a Room Scheme. Plus, property income of over £2,500 needs to be reported via a Self Assessment tax return. Find out more at gov.uk.

Pensions

Your annual pensions allowance allows you to save for your pension every tax year (6 April to 5 April) without paying tax on your contributions.

At present, the annual allowance stands at £40,000 (or 100% of your earnings if lower). Only contributions above this amount are taxable. If you are employed, your employer will take pension contributions out of your pay first and then deduct income tax (thereby giving you tax relief). If you are self-employed, your pension provider will claim tax relief and add it back into your pension pot.

Carrying your allowance forward

Your Pension Annual Allowance can be carried forward for three years, but you must have the relevant earnings for the contribution in the tax year in which you contribute. It, therefore, makes sense to use your allocation annually if possible.

High earners may only be eligible for a reduced pensions allowance. You can find out more here.

Planning your retirement distribution

At Redwood Financial, we have specialist Pension Advisors who can help you plan for financial security in later life. Skilled in asking the right questions to arrive at a retirement income distribution strategy that will work for you, we can assess how to make the best use of your assets and pension pot.

From understanding the tax allowance rules associated with taking your pension as a lump sum to the tax implications of working at retirement age, our knowledgeable team can give you the information you need to make fully informed decisions.

You can find out more on our dedicated Pension Advice page, where we also explore some frequently asked questions.

Blind Person’s Allowance

If you’re registered as blind or have a severe sight impairment, you may be eligible for Blind Person’s Allowance. This is an extra tax-free allowance that, when combined with the standard Personal Allowance, enables you to earn more before paying tax. It’s a benefit that needs to be applied for via HMRC.

Contact us

That brings us to the end of our guide to tax allowances in 2022/3. Of course, how much tax you pay is only part of the equation. At Redwood Financial, we’re experts in helping you make the most of your income and navigate investments, pensions and estate planning.

To arrange an Initial Meeting with one of the Redwood Team, simply get in touch.