No one wants to pay more tax than they have to. But with complex rules and allowances, you may be overlooking a few opportunities to reduce your bill. Our roundup of tax-efficient allowances is designed to help you get the most out of your finances, from your savings through to what you leave behind for loved ones.

The seven allowances to keep in mind when creating your financial plan are:

1. Personal Allowance

Let’s start with Income Tax. Everyone can earn up to £12,500, known as the Personal Allowance before Income Tax is due. Above the Personal Allowance, the following Income Tax bands apply:

BandTaxable incomeTax rate
Basic rate£12,501 to £50,00020%
Higher rate£50,001 to £150,00040%
Additional rateOver £150,00045%

Whilst you may not have control over when some of your income is paid, for instance, a salary, it’s worth keeping the Personal Allowance and tax bands in mind when planning adjustable income. For example, delaying a pension withdrawal until the following tax year could mean paying less in Income Tax if your total earnings are close to a threshold.

2. Savings allowance

Since 2016, a savings allowance has been available. This may allow you to earn interest on savings tax-free. It covers:

  • Savings held in bank and building society accounts
  • Accounts with providers like credit unions or National Savings and Investments (NS&I)
  • Interest distributions (but not dividend distributions) from authorised unit trusts, open-ended investment companies and investment trusts
  • Income from government or company bonds
  • Most types of purchase life Annuity payments

Your savings allowance is linked to your tax rate:

  • Basic rate (20%) taxpayers have up to £1,000 tax-free on savings income
  • Higher rate (40%) taxpayers have a reduced savings allowance of £500
  • Additional rate (45%) taxpayers have no personal savings allowance

3. ISA allowance

The ISA (Individual Savings Account) allowance gives you an opportunity to save and invest tax efficiently. Each tax year you can place up to £20,000 into ISAs, opting to either deposit the full allowance in one account or spread it across several. Interest earned in Cash ISAs and returns generated in Stocks and Shares ISAs aren’t liable for Income Tax.

There is a range of ISAs available in addition to the traditional Cash and Stocks and Shares ISA. A Help to Buy ISA offers an additional 25% government bonus on contributions for first-time buyers, whilst a Lifetime ISA (LISA) also provides a 25% bonus for those saving towards a first home or retirement. In addition, an Innovative Finance ISA may be suitable for some investors with a high-risk profile.

If you don’t use the ISA allowance it cannot be carried forward.

4. Dividend allowances

Each tax year you can take up to £2,000 in dividends tax-free in addition to your Personal Allowance. Whilst this has remained the same from the last tax year, it’s significantly lower than then 2017/18 allowance of £5,000.

Above the tax-free threshold, the level of tax paid on dividends varies depending on your tax band:

  • Basic rate taxpayers pay 7.5% on dividends
  • Higher rate taxpayers pay 32.5% on dividends
  • Additional rate taxpayers pay 38.1% on dividends

5. Capital Gains Tax

Capital Gains Tax is a tax on the profit when you dispose of assets that have increased in value. You may pay it when you sell:

  • Most personal possessions worth £6,000 or more, excluding your car
  • Property that’s not your main home
  • Shares that are not in an ISA or PEP (Personal Equity Plan)
  • Business assets

The rates for Capital Gains tax range from 10% to 28%, depending on your overall annual income and the asset that’s being sold. However, the Capital Gains Tax allowance each year is £12,000 for individuals or £6,000 for trusts. The allowance has to be used each year and cannot be carried forward.

6. Pension tax relief

Pension tax relief is designed to encourage savers to put more to one side for retirement by providing a government boost that is effectively ‘free money’. The level of tax relief is directly linked to the highest rate of Income Tax you pay:

  • Basic rate taxpayers get 20% tax relief
  • Higher rate taxpayers get 40% tax relief
  • Additional rate taxpayers get 45% tax relief

Usually, basic rate tax relief is applied automatically, but you will have to claim tax relief if you pay Income Tax at a rate above 20%.

How much you can contribute to your pension and still receive tax relief, again, depends on your earnings. Usually, the Annual Allowance is up to 100% of your annual earnings or £40,000, whichever is lower.

However, if you earn more than £150,000 your annual allowance is reduced. The Tapered Annual Allowance reduces the Annual Allowance by £1 for every £2 of your income that exceeds the £150,000 threshold, up to a maximum reduction of £30,000. So, if your annual income is £210,000 or greater, your Annual Allowance will be just £10,000.

Unused pension allowance can be carried forward by up to three years.

7. Gifting allowance

Whilst this allowance won’t have an immediate effect on the amount of tax you pay, it can mean loved ones pay less Inheritance Tax (IHT) on the wealth you leave behind. If the accumulation of all your assets exceeds the nil-rate band (£325,000), IHT may be due on your estate at a standard rate of 40%.

Reducing the overall value of your assets whilst alive through gifting can decrease the eventual IHT bill. Each tax year, you can gift up to £3,000 which will be considered outside of your estate immediately. Other immediately exempt gifts include those that are worth less than £250, a wedding gift to your children worth £5,000 or less, and gifts that help with living costs. However, gifts that aren’t immediately exempt may be included as part of your estate for IHT purposes for up to seven years.

Any unused gifting allowance may be carried forward to the following tax year once.

Want to better understand how these allowances and other financial opportunities can support your goals? Contact us today to discuss your personal circumstances.