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11 Apr 2022

New tax year: you could earn up to £43,360 tax-free in 2022-23

Make the most of allowances and tax reliefs to keep more of your income

Now the 2022-23 tax year has begun, it's important to know which tax allowances, reliefs and changes will affect your tax bill this year, so you know you're not paying more than you need to.

While most tax thresholds have been frozen until 2026, several tax rates have increased which could mean you'll pay more tax this year.

Here, Which? explains how to make the most of tax-free allowances, from making extra money from your property to making the most of tax breaks for spouses.

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What are tax-free earnings?

Each tax year, you have a tax-free allowance for certain types of income, where you'll only have to pay tax if you exceed the allowance.

Taxes and allowances vary depending on where the income has been earned, and which income tax band you fall into.

It sounds complicated, but we've broken down each type of tax and its allowances for you - just click on the links to find out more:

In addition, if you rent or sell the things you own you could qualify for these allowances:

Personal allowance sticks at £12,570

The personal allowance is the amount you can earn from your salary - whether you're employed or self-employed - before paying income tax.

For 2022-23, this is £12,570 - the same as in 2021-22.

In the March 2021 Budget, Chancellor Rishi Sunak said the personal allowance - along with several other tax allowances - would be frozen until 2026.

Income tax when you earn more than the personal allowance

If you earn more than £12,570, you'll have to pay income tax on the amount that exceeds the personal allowance.

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

  • 20% basic-rate: £12,571-£50,270
  • 40% higher-rate: £50,271-£150,000
  • 45% additional-rate: £150,000+

There are different tax bands and rates in Scotland, which are as below in 2022-23:

  • 19% starter-rate: £12,571-£14,732
  • 20% basic-rate: £14,733-£25,688
  • 21% intermediate-rate: £25,689-£43,662
  • 41% higher-rate: £43,663-£150,000
  • 46% top-rate: £150,000+

Regardless of where you are 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.

National Insurance thresholds and rate changes

You'll also pay National Insurance contributions (NICs) from your salary.

These are more complicated than usual this year; not only have rates increased by 1.25 percentage points for class 1 and class 4 contributions, but the thresholds changed on 6 April - and will change again on 6 July.

From 6 April to 5 July 2022

Employees will pay class 1 contributions 13.25% (up from 12% in 2021-22) on earnings between £9,880 and £50,270, and 3.25% (up from 2% in 2021-22) on earnings above £50,270.

Self-employed workers would usually pay class 2 contributions of £3.15 per week if they earn more than £6,725, however these have been scrapped and will only kick in for those who earn more than £9,880 - along with class 4 contributions of 10.25%.

From 6 July 2022 to 5 April 2023

From 6 July, employees will pay class 1 contributions on earnings between £12,570 and £50,270.

Class 2 and class 4 contributions will also be paid on self-employed income above £12,570.

For the whole of 2022-23, any self-employed workers who earn more than £6,725 - and therefore would usually have made class 2 contributions - will still receive National Insurance credits.

Dividend allowance remains at £2,000 - but rates have risen

You can earn up to £2,000 from dividends without paying any dividend tax in 2022-23.

You might earn dividends if you receive a return after investing in company shares, but if you earn more than the allowance this year, you'll pay more tax as the tax rates have increased by 1.25 percentage points since 2021-22.

The rate of dividend tax you pay depends on your income tax band:

  • Basic-rate taxpayers: 8.25%
  • Higher-rate taxpayers: 33.75%
  • Additional-rate taxpayers: 39.35%

Find out more:dividend tax

Capital gains allowance is still £12,300

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.

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

If you have a spouse or civil partner, you don't have to pay CGT if you sell or give assets to them, meaning both partners can make use of their CGT allowances when you sell the items.

What's more, you can also offset any losses you incur - including those from previous tax years.

Marriage allowance transfer of £1,260

Couples who are married or in a civil partnership can increase their tax-free take-home pay by £252 in 2022-23 - as well as backdating their claim to get a tax rebate of up to £1,242.

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.

If you think you're eligible, check with HMRC directly, as we've found instances where third-party companies charge up to 48% to set up the allowance on your behalf.

Trading allowance of £1,000

The trading allowance is an exemption of up to £1,000 a year for people who have casual trading income - be it for babysitting, selling items on eBay or doing odd gardening jobs.

If you earn less than £1,000 you don't have to tell HMRC, but if you earn more you'll have to declare your income as part of a self-assessment tax return.

Property allowance of £1,000

The property allowance works in a similar way to the trading allowance, except that the £1,000 exemption is 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.

What's more, this allowance can't 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.

Earn up to £7,500 with the rent-a-room scheme

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.

If you earn more than £7,500 from letting a room, you'll need to declare your income in a self-assessment tax return.

Get up to £6,000 in tax-free savings interest

Depending on your income, you could earn up to £6,000 in savings interest without having any tax to pay.

If you earn £12,570 or less, you can qualify for the savings starting rate of £5,000; this reduces by £1 for every £1 you earn over the personal allowance, meaning you won't qualify for anything if you earn £17,570 or more.

In addition to this, basic-rate taxpayers get a personal savings allowance of £1,000.

This reduces to £500 if you're a higher-rate taxpayer; if you pay additional-rate tax, you don't get any personal savings allowance.

Save on tax with an Isa

You don't need to pay any tax on any savings or investment growth if your cash is held in an Isa.

The Isa allowance for 2022-23 is £20,000 - this is the maximum amount you're allowed to pay into an Isa in this tax year. 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.