The 2018-19 tax year kicks off today – so how can you slash your tax bill and minimise the amount you’re out of pocket?
By being savvy about the tax rules, we’ve worked out that you could earn income of up to £21,040 tax-free in 2018-19.
And you other tax-free allowances and reliefs could see you coining in another £21,200 without paying a penny in tax.
Which? explains how to max out your allowances and keep your taxes to a minimum in the coming tax year.
How to maximise your tax-free earnings
Each year, you’re able to earn a certain amount of money tax-free by taking advantage of allowances. Click the links below to find out more.
If you buy, sell or rent out anything of value, you can also use up other allowances:
- £11,700 from selling assets
- £7,500 from renting out a room
- £1,000 from trading
- £1,000 from your property
Whether you qualify for each of these will depend on your income and circumstances. But if you were eligible for the maximum amount of all of these allowances, your tax-free earnings will look like the graph below.
Whether you’re self-employed or employed by a company, everyone receives a personal allowance of £11,850 for 2018-19.
This is up from £11,500 in 2017-18.
The personal allowance is how much you can earn per year without being charged any tax.
Earnings above this are charged at 20% basic-rate tax up to a total salary of £46,350. If you earn between £46,350 and £150,000, you’ll be charged at the higher-rate tax of 40%, and above £150,000 at the additional-rate tax of 45%.
If you earn more than £100,000, you’ll start to lose the amount of personal allowance you receive. For every £2 over £100,000 you earn, your personal allowance will be reduced by £1 – so, if you earn £123,000 or more, you’ll have no personal allowance.
- Find out more: Tax-free income and allowances – see how much you can earn tax-free.
If you’re in Scotland, the calculations will be slightly different as you’ll pay the Scottish Rate of Income Tax.
The personal allowance is the same, at £11,850 for 2018-19, but there are more income tax bands.
If you earn between £11,850-£13,850 you’re in the starter rate band, and will be taxed at 19%. Those earning between £13,850-£24,000 will pay basic-rate tax at 20%.
There’s an intermediate rate of 21% for anyone earning between £24,000-£43,430. Higher-rate taxpayers are those earning £43,430-£150,000 and are taxed at 41%, and any earnings above £150,000 are taxed at the top rate of 46%.
Personal allowance is also reduced by £1 for every £2 earned over £100,000.
- Find out more: Income taxes in Scotland – see how the Scottish tax system differs to the rest of the UK.
If you have invested in company shares, you might earn dividends as part of your income.
Your annual dividend allowance for receiving these profits tax-free is £2,000 for 2018-19. This has reduced from £5,000 in 2017-18.
If you earn more than £2,000 from dividends, you’ll be taxed based on the rate you pay on your other income, as shown below.
To find out how much tax you’ll pay on your dividend income, try our dividend tax calculator.
If you earn between £2,000 and £10,000 from dividends, you need to tell HMRC, which then calculates how much tax you need to pay.
You can pay tax by either having HMRC adjust your tax code, so the tax is taken from your salary or pension, or by filling out a self-assessment tax return, where you’ll be sent a bill for what you owe.
- Find out more: Dividend tax – our guide to how much tax you’ll pay on income from shares.
Depending on your salary, you can earn up to £6,000 from your savings before paying tax.
This is a combination of the £5,000 savings starter-rate allowance and the £1,000 personal savings allowance.
The savings starter rate allows you to earn income from savings accounts without paying income tax.
It applies to people who earn less than £17,850 a year, but only those who earn less than the personal allowance can benefit from the full savings starter rate of £5,000.
Say you earned £11,000 from your job and £3,500 from savings interest. Your total income would be £14,500, all of which could be earned tax-free.
For every £1 you earn above the personal allowance, you lose £1 of savings allowance. So, if you earn £12,850 (£1,000 above the personal allowance), you’ll only receive £4,000 savings starter rate.
This continues to reduce until you get to £17,850, as the £5,000 will be reduced to zero by this point.
The personal savings allowance is separate – and in addition – to this.
Anyone who is a basic-rate taxpayer receives a £1,000 annual savings allowance. Higher-rate taxpayers can earn up to £500 on their savings before tax, and additional-rate taxpayers don’t receive any savings allowance.
If you’re married or in a civil partnership, you may be eligible for the marriage allowance.
This applies where one partner earns less than the personal allowance (£11,850) and transfers 10% of it to their partner (rounded up to £1,190). Their partner then receives a tax credit for this amount.
This tax credit is deducted from the amount of tax the higher-earning spouse would usually have to pay, meaning they’ll keep more of their salary.
The higher-earning spouse must be a basic-rate taxpayer, earning between £11,850 and £46,350 in 2018-19.
The illustration below shows how the marriage allowance works.
To find out if you might be eligible for marriage allowance – or the similarly-named married couple’s allowance, which is for those born before 6 April 1935 – try our calculator below.
- Find out more: Marriage allowance explained – all of your questions answered.
Capital gains are the profits you make from selling a valuable possession – whether it’s shares, a property or a painting.
The annual tax-free allowance for 2018-19 is £11,700 – that’s just for the profits you make after deducting the initial cost and allowable expenses such as dealing costs, stamp duty and advertising.
The allowance in 2017-18 was £11,300.
The amount you’re taxed above the capital gains allowance depends on the rate of tax you usually pay, and whether you’re selling property.
For most assets, basic-rate taxpayers are charged 10% tax and higher-rate taxpayers are charged 18%.
But for property sales, the rate is 18% for basic-rate taxpayers and 28% for anyone paying at the higher rate.
This is illustrated in the graph below.
- Find out more: Capital gains tax allowances and rates – more on how this tax works and what profits are tax-free.
The trading allowance was introduced last year to allow you to earn money from buying and selling low-value items – for example, auctioning an item on Ebay, creating crafts to sell on Etsy or doing odd jobs on sites such as AirTasker.
You can earn up to £1,000 per tax year without having to declare the extra income to HMRC. This applies to the 2017-18 tax year onwards.
If you earn more than £1,000 from these kinds of extra income streams, you need to submit a self-assessment tax return to HMRC to declare it.
- Find out more: Paying tax in the gig economy
Each year, you’re allowed to earn up to £1,000 from your property before having to pay tax on your extra earnings.
This is often used if you make money from renting out your property in a casual or low-cost way – for example, renting your driveway for parking, allowing people to hire your living room to watch a sporting event, or allowing your property to be used by film crews.
If you’re renting a room, it may be better to sign up to the Rent-a-room scheme – but you can’t claim this in addition to the Rent-a-room allowance.
- Find out more: Rent-a-room scheme: Letting a room in your home
The amount of tax you pay on income from letting your property depends on how much you earn and what you’re renting out.
If it’s a room within your property, you can earn up to £7,500 a year through the Rent-a-room scheme. If you earn more than £7,500, you’ll have to submit a self-assessment tax return and declare these earnings.
Alternatively, you can pay tax through self-assessment as though the entire property is a rental.
Rental income is taxed on your profits, meaning whatever is left over after you deduct any allowable expenses such as cleaning fees, building insurance, etc. You can find out more in our guide to tax on a rental income.
What can I do with my tax-free earnings?
If you’re in a position to save money, your annual Isa allowance will comes into play.
Every adult is allowed to deposit up to £20,000 in a cash, stocks and shares or innovative finance Isa, £4,000 in a lifetime Isa and £2,400 in a Help to Buy Isa. Earnings from savings in an Isa will be entirely tax-free.
You can mix and match where you deposit your money, as long as the total amount you put in an Isa doesn’t exceed £20,000 in a tax year.
The Isa allowance was the same in 2017-18.
Additionally, those with children can also pay up to £4,260 into a junior Isa. The junior Isa allowance is up from £4,128 in 2017/18.
- Find out more: How to find the best cash Isa
Other tax changes to watch out for
Council tax increases
Council tax rates have increased in most councils this year.
The 1.99% increase cap has been raised to 2.99%, with a further 3% available to councils that have demonstrated the need for extra social care funds.
When we mapped every council tax increase in England and Wales, we found 32 councils have applied increases between 5.8-5.99% – the new maximum rate.
Some councils have raised rates beyond this – which is possible by holding a referendum – such as Pembrokeshire with an 11.04% increase and Wiltshire with a 6.41% increase.
If you’d like to check the council tax rates for your local authority, use our council tax calculator. Simply enter your postcode to see what your local authority is charging for all of the council tax bands.
- Find out more: Mapped: every single council tax increase in 2018-19
Our guide on reducing your council tax bill could help make your bills more manageable.
Inheritance tax changes
The ‘nil-band rate’ for inheritance tax – meaning the tax-free amount you’re allowed to pass on from your estate to those in your will – has remained frozen at £325,000 per person in 2018-19. But there are other changes to take note of.
An additional allowance – the residence nil-rate band – has increased, now standing at £125,000 per person.
This was £100,000 in 2017-18, and is set to increase by £25,000 every year until 2020, when it will reach £175,000.
This allowance can be added to the original nil-rate band, giving a total of £450,000 per person for 2018-19. Anything above this will be taxed at 40%.
But there are a few caveats.
First, the residence nil-rate band can only be added for those passing on property within their estate. Second, this property must be passed on to ‘direct descendants’. These must be:
- Children and their spouses or civil partners
- Grandchildren and their spouses or civil partners
- Great-grandchildren and their spouses or civil partners
- Adopted children
- Foster children
- Children who were under the guardianship of the people passing on their estate.
If any of these caveats are not fulfilled, heirs will be taxed at 40% on anything over the original nil-band rate.
We’ve outlined further rules to the residence nil-band rate in our guide on inheritance tax property changes.
- Find out more: Inheritance tax changes in April 2018: what you need to know
Mortgage interest tax relief cuts
Landlords will see profits fall this tax year as the government reduces how much of their mortgage interest can be offset against their tax bill.
For those who fill out a self-assessment tax return, you’ll only be able to claim 75% of your mortgage tax relief for the 2017-18 tax year.
In 2018-19, this is reduced to 50%, and will be reduced further to 25% in 2019-20.
For the remaining mortgage interest left after you’ve made your tax claim, the government will issue a 20% tax credit.
The video below explains the basics of mortgage interest tax relief.
For more information, see our guide fully explaining buy-to-let mortgage tax relief changes.
- Find out more: 12 things buy-to-let landlords need to know in 2018