By utilising various methods to save tax, it is possible to receive up to £41,370 while at the same time, pay zero tax on it.
Here are the secrets to earn as much as possible while paying as little tax as possible.
Initial earnings of up to £12,570 in the 2021-22 and 2022-23 tax year will not receive any taxation. It is possible to transfer assets that are producing income to your spouse or civil partner. This is useful if your spouse or civil partner cannot maximise this personal allowance. The income tax charged will be either at a lower rate or zero.
So long as you are not on an emergency tax code, you will automatically receive the personal allowance. Starting July 6, the National Insurance threshold will have risen to £12,570 from the previous amount of £9,568 as well. This means that you will not pay National Insurance until you earn above £12,570.
Interest savings Allowance
For people earning under £17,570 per year, you will not pay any tax on interest from savings up to £5,000.
You are only able to claim the full tax free amount if you are earning under £12,570. For every £1 that you earn above £12,570, the allowance will reduce by the same amount.
Those which are in retirement or do not work and also have a large pool of savings, commonly use this allowance.
PAY ZERO TAX with Personal savings Allowance
Those who earn above £17,570 may be eliglble for personal savings allowance.
For someone earning between £12,571 and £50,270, basic rate tax payers can claim up to £1,000 as a personal savings allowance on top of the starting rate for savings. Any amount above this will be taxed at 20%.
People earning above £50,270, also known as higher-rate tax payers, will receive a reduced personal savings allowance of £500. 40% taxation will apply to any amount going above the £500 personal savings allowance.
Those with earnings above £150,000 per year (additional-rate taxpayers) do not get a personal savings allowance.
Pay Zero tax on Dividends
The first £2,000 of dividends from investments excluding ISAs are exempt from paying any tax. They are also taxed at a special rate outside of the initial £2,000. The dividends tax rates are 8.75%, 33.75% and 39.35% for basic-rate taxpayers, higher-rate taxpayers and additional-rate taxpayers respectively.
Savings in an ISA up to £20,000 per year and any dividends paid on said investments are free from tax, so using the allowance beforehand is a clear choice.
Pay zero tax on Capital Gains
The first £12,300 of profit received from capital gains is exempt from tax. Some examples of capital gains includes the selling of shares, properties outside of your main home (which is exempt), and high-value art. This exemption cannot be carried forward. Selling assets over the course of multiple tax years will let you make the most of this exemption.
For assets in possession of multiple people, via marriage for example, each person can use their allowance. Selling a second house owned by two people means that £24,600 of profit will be exempt from tax.
Giving your spouse assets is another way to make the most of the relief, as the transfer between spouses will not have Capital Gains Tax deducted.
PAY ZERO INCOME FROM YOUR INDEPENDENT WORK
If you have trading income from any independent work, such as babysitting or selling handmade products online, the first £1,000 per tax year is free from tax. However, this allowance is in lieu of claiming any business expenses. If your expenses go above £1,000, then deducting them from your trading income is more tax-efficient.
The rent-a-room scheme implemented by the government lets you rent out one or more rooms in your home and receive up to £7,500 of tax free income per year.
The rooms must meet a standard of quality and be part of the home that you live in.
If you earn above £7,500 from rental income, a tax return will need to be completed and submitted to HMRC, and tax will need to be paid on either all of the profit after utility and maintenance costs are deducted, or on any income exceeding £7,500.
If you wish to claim expenses against your rental income, for any work done to your house which does not increase its value, you cannot take part in the rent-a-room scheme at the same time. Whether it is more tax efficient to claim tax releif on expenses or take part in the rent-a-room scheme is up to the individual and whether the expense relief exceeds £7,500.
Property income exemptions
Any property income, ranging from land, buildings to even mobile homes such as caravans, the first £1,000 is tax free. Again, it may be more tax efficient to claim your expenses than to take the allowance depending on the individual. This cannot be taken in conjunction with the rent-a-room scheme.
So, how does this all add up to £41,370? Firstly, the first £12,570 of earnings is tax free. Adding the personal allowance of £5,000 plus the additional £1,000 totals £18,570. £2,000 on dividends increases this value to £20,570. You can receive £12,300 on capital gains, £32,870. Trading allowance of £1,000 is £33,870, and including the rent-a-room scheme of £7,500 gives us a grand total of £41,370.
While you might not be able to claim every tax relief on this list, hopefully there are one or two items on this list you didn’t know about.
GET AN Accountant, or go solo?
It is a common occurance that people pay more tax than they should due to not knowing about the allowances listed above.
At CIGMA Accounting Ltd, we go through great efforts to save you time and taxes.
Allowing CIGMA Accounting Ltd to prepare your tax return also reduces the risk of filing an erroneous tax return.
If you have tax returns that need submitting, speak to one of our members today to receive a quote free of charge.