Tax Allowances 2024-2025
How to make the most of your tax allowances
They say two things are certain in life: death and taxes. Thankfully, at least when it comes to the latter, we are able to reduce the amount of tax we may need to pay by making the most of our tax-free allowances!
There are a number of tax-free allowances that we can utilise when it comes to earning and investing money. In this article, we are going to talk through some of the key allowances available to you every tax year. The current tax year runs from 6th April 2024 to 5th April 2025, and permits the following tax allowances:
- Personal allowance: £12,5701
- ISA allowance: £20,0002
- Junior ISA allowance: £9,0003 (under 18s only)
- Pension allowance: £60,0004
- Capital gains allowance: £3,0005
- Dividend allowance: £5006
- Personal Savings Allowance (PSA): £1,000 (basic rate income tax band)7
Tax-free allowances can and do change with each tax year. It’s also important to remember that tax treatment depends on individual circumstances and is subject to change, so it’s always worth checking the gov.uk website.
Personal Allowance - £12,570
This isn’t what your parents used to give you at the weekends; this is something HMRC gives us each tax year! Most people are familiar with income tax, as that’s what we pay when we earn some money. But, we only start paying income tax once we have used up our ‘personal allowance’. Each tax year, which runs from 6th April to the following 5th April, we receive a tax-free personal allowance, currently set at £12,570. This means we pay no income tax on the first £12,570 that we earn each tax year.
If you start to earn more than this then you will then begin paying income tax, where the income tax rate bands range from 20-45%. The average UK salary is around £31,000. This means, for the average person, tax is only paid on £18,430 worth of earnings as we pay no tax on the first £12,570 worth of earnings.
This is the main income-related tax allowance that we need to be aware of. Luckily, when it comes to investing, there are also allowances we can utilise, specifically the Capital Gains Tax Allowance and the Dividend Tax Allowance.
Please note, your Personal Allowance may be bigger if you claim Marriage Allowance or Blind Person’s Allowance, or it may be smaller if your income is over £100,000.
ISA Allowance £20,000 & Pension Allowance £60,000
Now, let’s get to the real fun - investing allowances! Before we dig into these investing allowances a bit deeper, it’s worth mentioning ISAs and pensions. We can use certain ISA and pensions accounts to invest. They work differently, but both have built-in tax advantages. With an ISA, we pay no tax on any gains or dividends. With a pension, although we pay tax in the future, we are able to avoid some tax today, as contributions are made from our gross pay before we pay income tax.
Each tax year we receive a £20,000 ISA allowance and £60,000 pension allowance (children get a £9,000 allowance in a Junior ISA). Your annual allowance is the most you can deposit into your ISA or pension pots in a tax year (6 April to 5 April) before you have to pay tax, and the allowance resets every April. As a rule of thumb these accounts should be prioritised to make the most of our tax allowances. By the way, you can open a Stocks & Shares ISA and a Junior ISA with Wombat.
A General Investment Account or GIA is another type of account that you can open, and use to invest, with Wombat. GIAs accounts don’t have any built-in tax advantages, but we are able to utilise the Capital Gains Tax and Dividend Tax allowances when using these types of accounts.
Remember when investing, your capital is at risk. Tax treatment depends on individual circumstances and is subject to change.
Capital Gains Allowance - £3,000
When you go to the gym, ‘gains’ refers to when you put on some muscle, and when you invest, ‘capital gains’ are when your investments increase in value! Each tax year, we get a Capital Gains Tax (CGT) allowance. For the current tax year, this is £3,000. This means that we can make £3,000 worth of gains, outside of an ISA or pension, and pay absolutely nothing in Capital Gains Tax. It’s worth noting that you only pay CGT when you sell an investment, so if you never sell, then you’ll never pay CGT.
It is also possible to spread your sale if you have very large gains over a number of years to make use of the full allowance each tax year.
Dividend Allowance - £5,000
Who doesn’t love dividends? Money for simply holding on to a stock or fund! Each tax year, we also get a dividend allowance. For the current tax year, this is £500 for all individuals. This means that we can receive £500 worth of dividends, outside of an ISA or pension, and pay absolutely nothing in dividend tax. Lots of companies and funds pay dividends to reward shareholders.
You need a fairly large portfolio to receive dividends of £500 before you need to start paying dividend tax. For example, using Wombat, we can invest into Apple (which pays dividends). Apple’s stock price was around $170 in March 2024, and their annual dividend yield was 0.56%, meaning a quarterly dividend amount of $0.24 a share. This means to earn £500 in dividends from Apple over the year, you would need to hold 670 shares for a cost of around £90,000.
However, dividend yields of course vary between companies and funds. The S&P 500, the largest 500 US stocks, currently has a dividend yield of 1.34%. At this dividend yield, to receive £500 in dividends, you would need a much smaller portfolio around £10,000.
The more of this dividend allowance that we are able to use each year, the better. Because if we don’t use it - the same with each of these allowances - we lose it as the allowances do not roll over into the next tax year.
Personal Savings Allowance (PSA) - £1,000
We’ve spoken about income and investing, but what about saving? Well, guess what, we also get a saving or ‘interest earned’ allowance. So don’t keep that cash under your mattress, get it into a savings account and earn some tax-free interest! Each year, we are able to earn some interest from our savings and pay no tax. The exact interest earned allowance you get depends on your income tax band:
- Basic 20% rate taxpayers: £1,000
- Higher 40% rate taxpayers: £500
- Additional 45% rate taxpayers: £0
As of 1 March 2024, the average rate on easy-access savings accounts is 3.18% At 3.18% interest you would need around £30,000 in savings to earn £1,000 in interest. Some savings accounts offer even less interest in reality, which is why starting to invest is key, as we can earn higher rates of return. Therefore, you would need even more in savings to reach the £1,000 allowance. For most people, there’s no danger of earning more in interest than the personal savings allowance. But it’s still another important allowance to try to use up and be aware of! And remember, you can save £20,000 every year tax-free in an ISA, so if you are in danger of going over your PSA, an ISA is seriously worth considering.
Conclusion
Make use of these tax-free allowances! Seemingly, everything is going up: the cost of living, inflation, interest rates, taxes, and so on. The more we can make use of these tax-free allowances, the less we will pay in tax, and the more money we keep in our own pockets. Over the course of our lifetimes if we’re able to utilise the ISA allowance, pension allowance, and the capital gains tax and dividend allowance when it comes to using a general investment account, then we will be going a long way to reducing our tax bill.
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