The tax-free personal allowance is £12,570 and it will remain fixed at this figure until 2028. The basic rate tax band is also frozen until 2028 and is fixed at £37,700.
The higher rate tax band, which is also known as the 40% tax band is fixed to £57,271 until 2028.The additional rate (45%) tax band comes into play if you earn over £150,000 but this will decrease to £125,140 by the end of this tax year.
There is however an HMRC policy which they don’t publish in their guidelines which has led to it being known as the ‘hidden tax sinkhole’. This is because it involves 60% income tax and it is caused by the tapering of personal allowances. It essentially means that someone earning between £100,000 and £125,140 could end up paying 60% income tax.
Making yourself aware of how much income tax you are currently paying and calculating is good practise for keeping track of your tax and earnings.
If you are married and your spouse works part-time, therefore earning less that the personal allowance, then it could be possible to transfer 10% of their personal allowance to you. In some cases, this could be really beneficial and even bring you down by a tax band if you’re lucky. We’ll discuss this more below.
Marriage Tax Allowance
This policy only applies if you are basic rate income tax and you partner or spouse earns below the personal allowance threshold of £12,570. It essentially allows the lower earner to transfer £1,260 (10%) of their personal allowance which results in a £252 reduction in tax.
The great part about of marriage tax allowance is it can be applied for up to 4 years prior which can equate to over £1000 in tax reductions. Once you’ve applied, it will automatically be reduced each year, so you won’t need to worry about re-applying.
Inheritance tax can be quite straightforward but there are a lot of intricacies that come into play depending on the make-up and size of the estate in question. The minimum value of an estate and its assets needs to be below £325,000; and this will remain fixed until 2028.
Any estates larger than this will need to pay 40% inheritance tax. There are however instances where the minimum amount can be raised to £500,000 for an individual case.
>Read more about how to reduce Inheritance Tax
Savings allowance & ISAs
It’s important to look into putting savings in an ISA as all income and capital gains are tax free. If you’re over 18 and don’t have a lifetime ISA then your allowance is up to £20,000. Your income tax band also has a savings allowance which will depend on how much you earn, this allows to save this money without necessarily having an ISA account.
There are numerous other financial planning benefits when you open an ISA or start saving more money, so you can reduce your tax while making smart financial decisions that will help grow your wealth.