The amount you can earn tax-free will go up this weekend as a new tax year kicks off on 6 April, but other changes may be less welcome. So, will you be better or worse off in 2019-20?
The new tax year brings an increase to the amount you can earn tax-free as an employee, but also a raft of other changes that could affect your tax bill, including new rules and updated allowances.
Now is the perfect time to find out how to take full advantage of the allowances and minimise the amount of tax you’ll need to pay.
From reducing tax on savings interest to using the Rent-a-room scheme, Which? reveals how much you could earn tax-free this year.
Maximise your tax-free earnings
Every year, you can earn a certain amount of money before you’ll have to pay any tax – this is your tax-free allowance. And it’s not just about money you earn from employment – profits on your savings, dividends and asset sales each have their own allowance.
Click on the links below to find out more about each one:
- £12,500 in employment income
- £2,000 from dividends
- £6,000 in savings interest
- £1,250 marriage allowance
If you buy, sell or rent anything of value, you could also qualify for several other allowances:
- £12,000 from selling assets
- £7,500 from renting out a room in your property
- £1,000 from trading
- £1,000 from your property
Personal allowance has risen to £12,500
The personal allowance is the amount of money you can earn in each tax year without being charged income tax.
For 2019-20, it will be rising to £12,500, up from £11,850 in 2018-19, and it’s the same whether you’re employed or self-employed.
This means you’ll be able to take more of your earnings home.
The graph below shows how the personal allowance has increased over the past few years:
Income tax when you earn more than the personal allowance
If you earn more than £12,500, you’ll have to pay tax on the earnings over the threshold:
- Earnings of £12,501-£50,000: you’ll pay 20% basic rate
- Earnings of £50,001-£150,000: you’ll pay 40% higher rate
- Earnings of £150,001+: you’ll pay 45% additional rate
The income tax bands and thresholds are different if you live in Scotland:
- Earnings of £12,5001-£14,549: you’ll pay 19% starter rate
- Earnings of £14,550-£24,944: you’ll pay 20% basic rate
- Earnings of £24,945-£43,430: you’ll pay 21% intermediate rate
- Earnings of £43,431-£150,000: you’ll pay 41% higher rate
- Earnings of £150,000+: you’ll pay 46% top rate
High earners will lose £1 of personal allowance for every £2 of their earnings that exceed £100,000. This means that anyone earnings over £125,000 will have no personal allowance, and pay tax on their full income.
National Insurance thresholds have risen, too
National Insurance is another bill you pay out of your salary, but the rates and thresholds are very different to income tax.
While everyone’s thresholds will increase in 2019-20, the effect on your pay packet will depend on how much you earn.
If you’re employed, you’ll pay Class 1 contributions of 12% if you earn between £8,632-£50,000 – in 2018-19 the minimum threshold was £8,424.
Earnings above £50,000 will be taxed at 2%. The threshold for this was £46,350 last year, so those earning just under £50,000 will find they pay more National Insurance this year.
If you’re self-employed, you’re likely to pay Class 2 and Class 4 contributions.
The threshold for having to pay Class 2 contributions will rise to £6,365, but the amount you pay is also going up, from £2.95 to £3 a week.
If you earn a profit between £8,632 and £50,000, you’ll pay for Class 2 as above, plus Class 4 rates of 9%. And profits over £50,000 will be taxed at 2%.
Find out more: National Insurance rates
Dividend allowance remains at £2,000
The dividend allowance was reduced from £5,000 to £2,000 in 2018-19, and this is where it will stay for 2019-20.
You might earn dividends as part of your income if you have invested in company shares. You’ll only be taxed if you earn more than £2,000.
The rates are shown below:
You can also check how much dividend tax you’ll pay with our dividend tax calculator below:
Capital gains allowance is up to £12,000
The capital gains allowance is how much profit you can earn from selling valuable items before having to pay tax. In 2019-20, this allowance is going up to £12,000 – a boost from £11,700 in 2018-19.
The graph below shows how the allowance has changed over the past few years.
If you own assets jointly with a spouse or civil partner, you can pool your allowances to bring the total to £24,000.
If you exceed the allowance, the amount of tax you pay will depend on which income tax band you fall into. Property is taxed at a higher rate, although your main home is excluded from all capital gains tax.
Basic-rate taxpayers pay 10% on assets and 18% on property. Higher and additional-rate taxpayers pay 20% on assets and 28% on property.
If you make losses on the assets you sell, you can offset these against your other gains.
Find out more: how capital gains are taxed
Marriage allowance has increased to £1,250
If you’re married or in a civil partnership, you might be eligible for marriage allowance.
This is for couples where one partner earns less than the personal allowance (£12,500 in 2019-20), and the other earns between £12,500 and £50,000, making them a basic-rate taxpayer.
The marriage allowance means the lower earner can transfer 10% of their personal allowance to their partner. This effectively means the higher-earning partner will be able to earn £13,750 before tax, rather than £12,500 – so they’ll be able to keep more of their salary.
In real terms, the higher-earning partner could make a tax saving of up to £250.
Find out more: marriage allowance explained
Trading allowance remains at £1,000
If you earn money from buying or selling low-value items, the trading allowance means you can earn up to £1,000 without paying tax on your profits.
This includes money earned from selling items on eBay, making crafts to sell on Etsy or doing odd jobs for sites like TaskRabbit or Airtasker.
If you earn more than £1,000, you’ll have to declare your earnings to HMRC via a self-assessment tax return.
Find out more: who should submit a tax return?
Property allowance of £1,000
In a similar way to the trading allowance, you can earn up to £1,000 from your property without having to declare it to HMRC.
This can be from things like renting out your driveway to park in, or using your house or garden for photo shoots or film sets.
As the allowance is relatively low, it’s unlikely to cover money you’d earn from renting out a room – in this case, it’s probably better to use the Rent-a-room scheme.
£7,500 with the Rent-a-room scheme
The Rent-a-room scheme threshold will remain at £7,500 for 2019-20 – this is the amount you can earn from letting a room in your home through the scheme.
It only applies to the property you live in. If your earnings exceed the threshold you’ll have to submit a self-assessment tax return to declare it.
Find out more: Rent-a-room scheme
Get up to £6,000 tax-free interest on savings
Depending on your income, you could earn up to £6,000 in savings interest this year without paying any tax.
This is through the combined use of the starter savings rate of £5,000 and the personal savings allowance of £1,000.
The catch is, that only those who earn less than the personal allowance will be able to claim this full £6,000 allowance.
For each £1 you earn over the £12,500 personal allowance threshold, the starter savings rate you’re eligible for will reduce by £1 – so, if you earn more than £17,500, you won’t qualify for the savings starter rate at all.
However, the £1,000 personal savings allowance can be claimed by anyone who is a basic-rate taxpayer – so, those with an income up to £50,000.
If you’re a higher-rate taxpayer, the personal savings allowance is reduced to £500, and additional-rate taxpayers don’t receive any personal savings allowance.
Find out more: personal savings allowance and tax on savings interest
Save more on tax by using an Isa
To avoid the issue of tax on interest altogether, you could choose to save into an Isa.
You can pay it all into one of these accounts, or mix it up between different types of Isas.
The graph below shows the maximum amount you can pay into each type of Isa.
The money held in an Isa is tax-free, so no matter how much interest your savings generate, you won’t be taxed on it.
You can also make tax-free savings for your children in a Junior Isa. The limit for how much you can pay in will rise to £4,368 for 2019-20.
This payment won’t come out of your Isa allowance; it’s totally separate.
Find out more: cash Isa rules and allowances