New tax year: how to maximise your tax-free allowances in 2023-24

Now the 2023-24 tax year has begun, it’s important to know which tax changes will affect your tax bill this year – particularly if you have capital gains and dividend income.

Many tax thresholds and rates have been frozen this year, while some tax-free allowances have have been cut, all of which could result in your tax bill being higher than it was in 2022-23. 

Here, Which? explains the tax allowances you might be eligible to use, and offers tips on how to reduce your tax bill – from maximising your pension contributions, to making the most of tax breaks for spouses.

What are tax-free earnings?

Each tax year, your tax-free allowances renew, detailing how much you can earn from certain types of income before you'll have to pay tax on it. 

The allowance and rate of tax can vary depending on your income and which tax band you fall into. 

Tax relief, on the other hand, is where you can claim back the tax you've already paid if you're eligible to do so.

Personal allowance: £12,570

The personal allowance is the amount you can earn before paying income tax. It's the same whether you're employed, self-employed or retired.

For the 2023-24 tax year, this remains at £12,570. It's due to be frozen until April 2028. 

Income tax when you earn more than the personal allowance 

You pay income tax on the money you earn that exceeds the personal allowance.

In England, Northern Ireland and Wales, you earnings will fall into three tax bands: 

• 20% basic-rate: £12,570 to £50,270
• 40% higher-rate: £50,271 to £125,140
• 45% additional-rate: more than £125,140.

There are different tax bands and rates in Scotland, which are as below in 2023-24:

• 19% starter-rate: £12,571 to £14,732
• 20% basic-rate: £14,733 to £25,688
• 21% intermediate-rate: £25,689 to £43,662
• 42% higher-rate: £43,663 to £125,140
• 47% top-rate: more than £125,140.

Regardless of where you live in the UK, your personal allowance will be reduced by £1 for every £2 you earn over £100,000. This means that by the time you earn £125,140, you'll have to pay income tax on all of your income.

• Find out more: tax-free income and allowances

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National Insurance: £12,570

Most people also pay National Insurance contributions (NICs) from your salary. 

In 2023-24, employees will continue to pay 12% Class 1 National Insurance on earnings between £12,570 and £50,270. You pay 2% on earnings above £50,270.

Self-employed workers need to pay Class 2 and Class 4 contributions on income above £12,570. Class 2 rates are charged at a flat rate of £3.45 per week in 2023-24, while Class 4 is charged at 9% on earnings between £12,570 and £50,270, and at 2% when you earn more than £50,270.

You'll stop paying National Insurance when you reach state pension age, even if you continue to work or defer your payments.

• Find out more: National Insurance rates

Dividend allowance: £1,000

You can earn up to £1,000 tax-free if you receive income from dividends in 2023-34. This is half the amount it was in 2022-23 tax year, when you could earn up to £2,000 without paying any tax. 

The government is also planning to reduce this allowance further in 2024-25, when it's set to be just £500. 

The dividend tax rates will remain the same as they were last year and vary depending on your overall income. Basic-rate taxpayers will pay 8.75%, while it's 33.75% for higher-rate taxpayers and 39.35% for additional-rate taxpayers.

• Find out more: dividend tax explained

Capital gains tax allowance: £6,000

The capital gains allowance is the amount of tax-free profit you can make from selling valuable items, or properties that aren't your main home.

The profit is the amount the item sold for, minus what you paid for it and any applicable expenses, such as payments to organise the sale.

If the profits exceed the allowance, the amount of capital gains tax (CGT) you'll pay will depend on what you're selling, and your income tax band.

This allowance has also been halved to £6,000, having previously been £12,300 in the 2022-23 tax year.

Basic-rate taxpayers pay 10%, or 18% on property. Higher and additional-rate taxpayers are charged 20%, with 28% levied on property sales.

• Find out more: capital gains rates and allowances 

Marriage allowance: £252

Couples who are married or in a civil partnership can increase their tax-free take-home pay by £252 in 2023-24 – as well as backdating their claim to get a tax rebate of up to £1,242.

To be eligible, one partner must earn less than the personal allowance (£12,570), and the other partner must be a basic-rate taxpayer earning between £12,571 and £50,270.

Marriage allowance enables the lower-earning partner to effectively transfer £1,260 of their personal allowance to the higher-earning partner, boosting their personal allowance to £13,830 and reducing their tax bill.

• Find out more: marriage allowance explained

Trading allowance: £1,000

The trading allowance is an exemption of up to £1,000 a year for people who have casual trading income – such as selling items on Vinted or eBay, or dog walking, to name just a couple of examples. 

If you earn less than £1,000 you don't have to inform HMRC, but if you earn more you'll have to declare your income as part of a self-assessment tax return. If you submit a tax return for other income, you should include any casual income – and you can specify if you want to apply the trading allowance to it. 

Note that if you use the trading allowance, you won't be able to claim for expenses, so it's worth weighing up which option works better for you.

• Find out more: do you need to pay tax on your side-hustle?

Property allowance: £1,000

The property allowance works in a similar way to the trading allowance, except that the £1,000 exemption is only for income from your land or property – for instance, if you charge to rent out your driveway.

If you earn less than £1,000 you don't have to declare the income to HMRC, but anything over £1,000 will usually require a self-assessment tax return.

However, the property allowance cannot be used in conjunction with the rent-a-room scheme, and if you use the allowance for earnings against one property it means you will be unable to claim for actual expenses you've incurred on any other properties.

Rent-a-room scheme: £7,500

The rent-a-room scheme allows you to earn up to £7,500 from letting a room in your home before the earnings are subject to income tax. 

This can only be applied to rooms being let in the property you live in.

You'll need to declare rental income as part of a self-assessment tax return. If you earn less than £7,500, you'll automatically be exempt from paying tax on this income – you'll just need to keep a record of how much you've received. 

It's possible to opt out of the scheme and choose to have the rental income taxed under the normal rules; in this case, you'll pay tax on the difference between your rental income and your rental expenses. This might work out better if, say, you've made a loss while letting out the room in your home that you'd like to offset against the rental income from another property.

Find out more: rent-a-room scheme explained

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5 ways to reduce your tax bill

1. Max out your pension

The government pays tax relief on pension contributions, meaning some of the money you would have paid in tax on your earnings instead goes into your pension pot, so it's a good idea to make the most of it.

However, there is a limit on how much you can pay into your pension each year – this is called the pensions annual allowance. It has been set at £60,000 for 2023-24 (up from £40,000 in 2022-23).

Any pension payments you make over the £60,000 limit will be subject to income tax at the highest rate you pay.

However, you can carry forward unused allowances from the previous three years, as long as you were a member of a pension scheme during those years.

If you contribute to a workplace pension, your employer may apply full tax relief for the tax rate you pay before you get your pay cheque (known as a ‘net pay’ arrangement). But if your employer uses a ‘relief at source’ approach, or if you have a personal pension, you will only receive basic-rate tax relief. 

If this is the case, higher and upper-rate taxpayers can claim the extra via their tax returns. 

If you haven’t previously claimed, you can backdate pension tax relief for up to four years. 

• Find out more: tax relief on pensions contributions explained 

2. Split your gains with your spouse

Married couples and civil partners can reduce their capital gains tax bill by transferring assets into joint names, effectively pooling both partners’ tax-free CGT allowances – meaning you could double your allowance to £12,000 in 2023-24.

However, if you choose to transfer any of your assets to your partner, bear in mind that if you later sell the asset, you'll be charged based on the gain made during the full period it was owned by either of you, rather than since the asset was passed to your partner.

• Find out more: capital gains tax rates and allowances

3. Save and invest with Isas

If your savings interest exceeds the personal savings allowance, and you have investments that could land you with a dividend tax or capital gains tax bill, it can be worth looking to an Isa. 

You can pay in up to £20,000 in 2023-24, and all growth is protected by the Isa's tax-free 'wrapper'.

You can either use the whole allowance with one account, or split it between different types of Isas.

Cash Isas, stocks and shares Isas and innovative finance Isas can all receive up to £20,000 each tax year, but you can only pay in up to £4,000 into a lifetime Isa.

You're only allowed to pay into one of each type of Isa in each tax year. For example, you could pay into a lifetime Isa and a cash Isa in the same tax year, but you can't pay into two cash Isas. 

• Find out more: cash Isa rules and allowances

4. Claim tax relief on work expenses

You can claim certain job-related expenses – either where you've not been reimbursed by your employer, or where you were reimbursed but have been taxed on what you received.

As a general rule, you're only allowed to claim costs for items or services you've bought 'wholly and exclusively' in relation to your job. To make a claim, you'll need to detail what you've spent, and you'll receive tax relief on that amount either paid as a rebate, or paid through your PAYE tax code. 

You may be able to claim tax relief on expenses related to maintaining a work uniform, or if you have to work from home because your employer does not have an office. 

• Find out more: tax-deductible work expenses 

5. Make charitable donations

If you’re a higher-rate or additional-rate taxpayer and have made Gift Aid declarations when giving to charity, you can use your tax return to claim back the difference between the basic-tax rate and the rate you pay. 

It can be easy to forget how much you have given over a year, especially if you’ve made small ad hoc donations, so go through your bank statements and emails carefully to check.

• Find out more: tax reliefs