If we’re being totally honest…we’d all love to pay a little less tax, right? Well in regards to income tax there are a few items which have tax-free allowances so they are worth knowing to ensure you’re not putting aside money for tax which isn’t required.
Interest on Savings
This is what’s known as your ‘Personal Savings Allowance’ which applies to each tax year from April 6th to April 5th the following year. Currently (April 2016) this allowance is at £17,000 – which means if you have any savings then if the interest you earn is below £17,000 then you don’t need to pay any tax on that amount. Happy days!
This doesn’t apply to savings in tax-exempt accounts like ISAs etc, it mainly applies to:
- bank and building society accounts
- savings/credit union accounts
- investment trusts, unit trusts and open-ended investment companies
- peer-to-peer lending
- government or company bonds
- life annuity payments
- certain life insurance contracts
Dividends on Company Shares
If you own shares in a company then you may be taking dividends from these shares. For this type of income there is a tax-free allowance of £5,000 (As of April 2016) so if your income from shares is under this amount then you wont pay any tax on this.
Another very important factor to remember here is that don’t pay any tax on income from dividends if the shares of that company are kept within an ISA account.
There are a number of state benefits which you don’t pay any tax on but the key ones to note are:
- Housing Benefit
- Employment and Support Allowance (income related)
- Income Support
- Working Tax Credit
- Child Tax Credit
- Disability Living Allowance
- Child Benefit (income based)
- Guardian’s Allowance
- Attendance Allowance
- Pension Credit
- Winter Fuel Payments and Christmas Bonus
- free TV licence for over-75s
- lump-sum bereavement payments
- Maternity Allowance
- Industrial Injuries Benefit
- Severe Disablement Allowance
- Universal Credit
- War Widow’s Pension
- Young Person’s Bridging Allowance
National Lottery Winnings and Premium Bonds
Although two seperate tax-free items, these are both ‘lottery-based’ so let’s list them under one heading.
Firstly, If (and this is a big ‘if’! haha) you win the lottery then not matter how much you win, you will not pay a single penny of tax on that amount! This is quite simply because the HMRC don’t regard this as an ‘income’.
Secondly, if you have premium bonds then you’ll likely already know this, but just in case – this is when your money is kept in a bond which has a monthly lottery distribution of tax-free money prizes, so in simple – any money you win is tax-free!
Rent from a Lodger in your Main Home
This tax-free allowance only applies to landlords who are a ‘resident landlord’ – meaning you rent out part of a property (room or floor) which is in your only/main home.
This allowance is known as the ‘Rent a Room Scheme’ which gives you a tax-free allowance of £7,500 for the income you gain from your tenant’s rent – so you don’t pay any tax on their rent up to £7,500, as soon as it’s over this amount you will start to pay tax.