6 April 2022 marked the start of the new tax year. This means that taxpayers have a fresh opportunity to make the most of various annual allowances and exemptions. What kind of simple, but effective, ideas should you be looking at?
Most people are aware that each year they are entitled to a tax-free personal allowance of £12,570 (2022/23 figure). Anyone looking to generate some income should keep this figure in mind, particularly if you have a measure of control over it, e.g. company owners. Multiple allowances can also be used if income can be divided between family members, e.g. between spouses. However, there are also other allowances and exemptions meaning that further income can be received tax free, if it is in the right format.
For example, a homeowner could let out part of their family home to a lodger. As long as there is shared occupation, up to £7,500 can be received completely free of tax. Investment income is also very efficient at lower levels. Up to £6,000 of savings interest can be received free of tax in the right circumstances (see here for further information). For shareholders, there is a £2,000 0% starting rate for dividends.
There are also annual allowances for making various investments that are lost if not used. An individual can put up to £20,000 into an ISA, where it can subsequently grow free of tax. Pension contributions of up to £40,000 can also be made each year with similar tax protected status.
It’s not just income that enjoys a tax-free allowance. Individuals can make capital gains on disposals of assets of up to £12,300 before needing to pay anything.
For the most part, these allowances do not rollover from one tax year to another. It is therefore a case of use them or lose them. Planning early will help ensure the maximum possible efficiency can be obtained.