Some of the more obscure tax allowances and exemptions
While many of us are aware of the traditional tax allowances and exemptions, others are perhaps less well-known. As the government’s tax take is currently at a 70-year high, taking advantage of all tax exemptions available to you is important. Your accountant and financial adviser will be able to help you, but we thought it would be helpful to list some of these exemptions, which may be relevant to your situation.
Savings allowance
As the term suggests, this is an annual allowance allowing you to earn interest on savings without paying tax. The details are as follows:-
- Allowance £5000 per annum
- Available if you earn no more than £17,570 per annum
This allowance is slightly complicated because every 1 pound above your personal tax allowance (currently £12,570) is deducted from your savings allowance. For example, if you earned £16,570 per annum and had an additional £1000 in savings interest, the calculation is as follows:-
Total income: £16,570
Personal tax allowance: £12,570
Taxable income: £4000
Savings allowance: £5000
Less taxable income: £4000
Remaining savings allowance: £1000
In this scenario, the £1000 in interest earned from your savings is within your adjusted savings allowance and, therefore, tax-free.
Personal savings allowance
The personal savings allowance is an additional allowance which allows you to receive interest of up to £1000 a year free of tax. The exact level of the allowance will depend on your income tax band. To work this out, add any interest to your additional income for the tax year and if you are within the:-
- Basic rate limit (up to £50,270 per annum), your allowance will be £1000
- Higher rate limit (up to £125,140 per annum), your allowance will be £500
- Additional rate limit (over £125,140 per annum), your allowance will be reduced to £0
It is important to note that if your wages, pension, and other income do not fully utilise your £12,570 tax-free allowance, your interest can be included in this figure (with no tax to pay).
Trading allowance
The trading allowance relates to gross income from what is often described as a “side hustle”, such as selling products on eBay or casual income. It’s important to stress that this allowance can’t be used to offset income from your regular employment. For the 2024/25 tax year, the trading allowance stands at £1000 per person, remembering this is gross income – which makes a difference!
So, if you earn an additional trading income of less than £1000 gross per annum, there will be no additional tax charge. However, if your gross trading income is more than £1000 per annum, the calculation gets a little trickier.
As someone who is self-employed or a sole trader, you have a choice. You can offset the trading allowance against gross income, or it may be more beneficial to offset costs and not utilise your allowance.
Examples
If you had an additional gross income of £2000, you can offset this against your trading allowance, leaving you to pay income tax on the remaining £1000. If you were a basic rate taxpayer, you would pay £200 tax on the £1000 above your allowance.
Let’s assume your costs were £500; normally, this could be deducted from the gross income of £2000 to create a net income of £1500. For a basic rate taxpayer, this equates to a 20% charge of £300, which means using your trading allowance would be more beneficial.
The situation is different if, for example, your costs were £1500, creating a net income of £500, which equates to an income tax charge of £100 at the basic rate of 20%. In this situation, using the traditional offset of costs against gross income would be more beneficial than using your trading allowance.
Trivial benefit rule
As an employee, many people automatically assume that any payments or benefits in kind received from your employer are taxable. Usually, they would be, but if the benefit is not worth in excess of £50, there is no tax to pay, assuming it isn’t:-
- Cash or a cash voucher
- Connected to a performance bonus
- Seen as a reward for work
- Part of the terms of your contract
In theory, there is no limit to the number of trivial benefits you can receive each year, assuming they abide by the above conditions. However, if a trivial benefit is received regularly, it may be disqualified from the exemption.
Staff canteen
Typically, the cost of supplying free or subsidised meals to employees is exempt from income tax and national insurance. However, to avoid any tax liabilities, it is essential to ensure that:-
- All employees, or employees in a particular location, are included, not just a specific element of the workforce (i.e. directors).
- The cost of the food must be on a “reasonable scale”, which is a relatively unhelpful HMRC definition.
- The service is not part of a salary sacrifice arrangement or a flexible remuneration package.
As a side note, the canteen does not necessarily need to be on the work premises. However, if you used a restaurant, it would not be eligible for the tax exemption. While much of this is common sense, it’s important to know the guidelines.
Medal exemptions for IHT
In the 80th year since the D-Day landings, it is an opportune moment to mention that many medals are discounted from an estate for inheritance tax purposes. This exemption relates to medals and decorations awarded by the Crown or a country outside of the UK in relation to:-
- The armed forces
- The emergency services
- Those recognised for contributions to public life
There is a degree of confusion regarding medals that qualify because while those awarded for bravery and contributions to public life will qualify, Olympic medals will still count towards your estate. It’s also important to recognise that the sale of such medals within your estate could see the proceeds taxed for IHT purposes – as opposed to retaining them as an exempt asset of your estate.
Armed forces relief
Unfortunately, armed forces relief is not as well-known as it should be. Many families are likely to have paid inheritance tax in the past when the estate of their loved ones was exempt. Under this relief, the estates of armed forces members who die in active service or later life due to injuries received in active service are exempt from IHT. Consequently, it is essential to take professional financial advice in this situation.
Cycle to work scheme
To promote good health and fitness, the government introduced a “cycle to work scheme“, which offers a tax-effective means of hiring/acquiring a bike. The scheme is relatively simple but very effective.
Your employer acquires a bike, which the employee then hires over a set period, usually 12, 36 or 48 months. The hire fee is deducted from the employee’s gross salary each month, reducing the level of income used when calculating income tax and national insurance liabilities. At the end of the hire period, there are three options:-
- Make a final one-off payment to take ownership of the bike and accessories, such as safety helmets, lights, etc.
- Return the bike (and accessories) and end the hire agreement and monthly deductions.
- Negotiate a new hire period.
A basic rate taxpayer can save just over 30% on the cost of the bike (and accessories), with enhanced savings for higher rate taxpayers. When the scheme was launched in 1999, there was an initial limit of £1000 per bike and accessories. However, this was removed in 2019, although many employers will have an internal limit on the amount that can be invested in a bike and accessories.
Tax Exemptions – Conclusion
As you read this article, you are probably beginning to realise there are numerous allowances and tax breaks that are perhaps not common knowledge. Many of them bridge blanket taxation and common sense, with some more focused on a healthier standard of living.
If you require further assistance with your tax returns or have spotted any additional tax breaks that could be relevant to you, please call us at your convenience. We have a number of experts who can examine your situation more thoroughly and identify potential savings.