A tax allowance is something that allows you to earn a certain amount of money tax-free. In the UK, there are a lot of allowances that are available to claim. In many cases, they prevent you from paying tax on certain earnings altogether.
Are allowances and tax reliefs the same thing?
No, not quite. An allowance is an amount that you can earn before you’re liable to pay tax. A tax relief is something that you use to pay less tax (reduce your tax bill).
When might you claim a tax allowance?
Here are some examples of common tax allowances that you might claim in the UK:
- Personal Allowance – this is available to everyone. You can earn up to £12,570 (in the 2023/24 tax year) tax-free every year. If you earn less than this, you don’t pay Income Tax
- Trading Allowance – when you earn less than £1,000 of gross self-employed income, you don’t have to declare it to HMRC. You can earn this tax-free
- Marriage Allowance – this is available to anyone with a spouse or civil partner. If one of you earns less than £12,570 and the other earns less than £50,270, the lower earner can transfer part of their Personal Allowance to the higher earning partner, reducing the tax they pay on their income
- Property Income Allowance – if you run a buy-to-let property business, you can earn your first £1,000 in rental income tax-free
- Rent a Room scheme – this can be claimed by live-in-landlords. The first £7,500 of rental income can be earned tax-free. If you don’t earn more than this every tax year, you won’t have to pay Income Tax on your rental income
- Capital Gains Tax Allowance – anyone selling assets (property, art, shares, crypto, etc.) may be liable to pay tax on their profits. But the CGT Allowance allows you to earn up to £6,000 (in the 2023/24 tax year) tax-free
How does it work if you’re employed vs. self-employed?
Allowances work in the same way whether you’re employed, self-employed or both. Each allowance has to be used in a tax year – and you can’t carry it forward to the next one.
In most cases, if you earn under a tax allowance, you won’t need to declare the earnings.