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.
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 £3,000 (in the 2024/25 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.