Tax can be a scary subject when you feel like you can’t completely get your head around it. This is especially true when trying to build up your savings. So, we’re here to provide those all important answers in a straightforward and easy to understand way.
This is a tax (a mandatory financial charge) you must pay to the UK Government based on your earnings. This money goes towards national services, such as health and social, education, defence, transport systems, and much more.
‘Personal allowance’ is a term used to describe the amount of income you don’t have to pay tax on.
The current standard personal allowance is £12,570 per year.
This may increase if you claim marriage or blind person’s allowance, or decrease if you earn more than £100,000 per year.
This is not something you need to think about regularly, but you’ll probably become more aware of your personal allowance if you are:
How much income tax you must pay will depend on how much of your income is above your personal allowance, and how much falls within each tax band. The tax year renews at the start of April. Therefore the 2024 tax year starts on 6 April 2024.
The taxable income bands during this year are as follows:
If you earn less than £12,570 as a self-employed individual, you must still complete a tax return – unless you earned less than £1,000.
In the UK, you must pay income tax on all earnings above the personal allowance threshold. So, anything over £12,570 each year.
However, there are some tax-free allowances, including:
Savings interest – as a starting rate, you may get up to £5,000 of interest and not have to pay tax on it as part of your usual income. This is separate to tax free accounts like an ISA.
Personal savings allowance – depending on the tax band you’re in, you can earn up to £1,000 in interest on your savings without having to pay interest. Basic-rate tax payers can earn £1,000; higher rate tax payers can earn £500; but additional rate payers can’t earn any tax-free interest.
Dividend income – you can earn some dividends tax free if you own shares in a company. In 2024/2025 this is expected to be a maximum of £500.
Trading – your first £1,000 of income from self-employment is not taxed. This is known as your ‘trading allowance’.
Rent – your first £1,000 of income from a property you rent is not taxed, unless you’re using the Rent a Room Scheme. The Rent a Room scheme is a Government initiative that lets individuals earn up to £7,500 tax-free, per annum, for letting out fully furnished accommodation within your residence.
To note, in order to qualify for these allowances, an individual would need to choose not to claim expenses. In most instances, claiming expenses for trading or property would work out beneficial unless income from either source is negligible.
If you’re employed, income tax will be deducted from your pay automatically by your employer (via the Pay As You Earn (PAYE) system) and you don’t have to action anything.
Generally, if there is additional income received alongside salaries, higher and additional rate tax payers will be required to complete a self-assessment tax return to determine the final amount of tax payable.
If you are self-employed, you must complete self-assessment tax returns. This can be done online or via paper, and you’ll need to keep records e.g. your bank statements and receipts.
If you’ve not completed a self-assessment before, you’ll need to notify HMRC by the 5 October. The team there will provide you with the necessary resources you need to complete the assessment and notify you of the amount owed.
All payments must be made by the end of January each year, following the tax year in question. Don’t be late or you’ll be charged a penalty! If you don’t want to leave it until the end of the year, you can make advanced payments towards your bill – the second payment deadline is usually the end of July.
How your personal savings are taxed depends on the type of account they sit in. As mentioned above, if you have a savings account, you should be able to earn some interest without paying tax.
How much is tax free will depend on your personal allowance, personal savings allowance, starting rate for savings, and personal savings allowance, but is up to around £5,000.
Your allowance will apply to interest earned from:
If you save using a cash ISA, and meet all the conditions set, any interest you earn is tax free for all ISAs. For this reason, if funds aren’t required immediately, many people choose to transfer an ISA at its term end to continue benefiting from high, tax free interest rates.
We’re not tax advisers, so you’ll need to speak to a specialist – but for more information on self assessment tax returns, start at Income Tax - GOV.UK (www.gov.uk).
There’s a lot of information here. So, if you have questions and would like to learn more, please take a look at our personal savings help and support hub. Here you can find answers to several FAQs and information on how to contact our knowledgeable and friendly team.
Alternatively, connect with us on social media and we can point you in the right direction. We’re on Facebook, Instagram, X (formerly Twitter), and LinkedIn.