When it comes to personal finance and tax planning, understanding tax allowances UK can make a huge difference to your annual savings. Tax allowances are portions of income you can earn before paying tax, and they exist to ensure taxpayers are treated fairly while encouraging saving and investment.
Many UK residents end up paying more tax than necessary simply because they are unaware of the allowances available. Whether you’re employed, self-employed, retired, or investing, making full use of these allowances is key to efficient financial planning.
In this guide, we’ll explore the main types of tax allowances UK residents should know, how they work, and the best strategies to maximise them.
What Are Tax Allowances?
A tax allowance is the amount of income you can earn without paying income tax. Each year, HM Revenue & Customs (HMRC) sets out allowance limits, which often change with new tax policies.
The most familiar allowance is the Personal Allowance, which lets you earn up to a certain amount before income tax applies. But there are other allowances for savings, marriage, dividends, pensions, and capital gains. Understanding how they interact with your income can help you reduce your tax burden significantly.
Key Tax Allowances in the UK
1. Personal Allowance
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For the 2023/24 tax year, the standard Personal Allowance is £12,570.
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This means you don’t pay tax on your first £12,570 of income.
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For those earning more than £100,000, the allowance tapers off by £1 for every £2 of income above that threshold.
💡 Tip: If your income is near this limit, pension contributions and charitable donations can help reduce your taxable income and restore lost allowance.
2. Marriage Allowance
If you’re married or in a civil partnership, the Marriage Allowance allows one partner to transfer up to £1,260 of unused Personal Allowance to the other, reducing the household’s tax bill by up to £252 a year.
💡 Tip: This works best when one partner earns below the Personal Allowance threshold and the other is a basic-rate taxpayer.
3. Savings Allowance
The Personal Savings Allowance provides tax-free interest on savings.
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Basic-rate taxpayers: £1,000 tax-free interest.
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Higher-rate taxpayers: £500 tax-free interest.
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Additional-rate taxpayers (earning above £125,140): not eligible.
💡 Tip: If your savings interest exceeds this, consider ISAs (Individual Savings Accounts), which allow tax-free interest without limits on eligibility.
4. Dividend Allowance
If you earn income from shares, you can benefit from the Dividend Allowance.
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In 2023/24, the dividend allowance is £1,000.
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From April 2024, it reduces to £500.
💡 Tip: Business owners and investors should plan ahead, as reduced allowances may impact future income.
5. Capital Gains Tax (CGT) Allowance
Profits from selling assets such as property, shares, or investments may attract Capital Gains Tax. However, you can use the Annual Exempt Amount.
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For 2023/24: £6,000.
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From April 2024: £3,000.
💡 Tip: Couples can transfer assets between each other to use both allowances, doubling the tax-free benefit.
6. Pension Contribution Allowance
Pensions are highly tax-efficient because contributions reduce taxable income and attract government tax relief.
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The annual pension allowance is £60,000 or 100% of your income (whichever is lower).
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You can also carry forward unused allowances from the past three years.
💡 Tip: Pension contributions are especially useful for high earners, as they can lower taxable income and help restore lost Personal Allowance.
7. ISA Allowance
ISAs aren’t officially called “tax allowances,” but they are one of the most effective ways to save and invest tax-free.
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Annual allowance: £20,000.
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Options include Cash ISAs, Stocks & Shares ISAs, Lifetime ISAs, and Innovative Finance ISAs.
💡 Tip: Use your full ISA allowance each year, as it cannot be rolled over.
How to Maximise Tax Allowances UK
To make the most of tax allowances UK, consider the following strategies:
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Plan early in the tax year – Waiting until March often means missed opportunities. Spread contributions and investments across the year.
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Use allowances as a couple – Married couples and civil partners can combine allowances and transfer assets strategically.
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Combine allowances with reliefs – Charitable donations, pension contributions, and business expenses can reduce taxable income further.
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Stay updated – HMRC changes allowances annually, so review your tax plan every year.
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Seek professional guidance – A tax advisor can help tailor strategies to your income, investments, and future goals.
Why Tax Allowances Matter
Making the most of your tax allowances UK provides several benefits:
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You keep more of your income.
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You reduce unnecessary tax liabilities.
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You build long-term financial stability.
For individuals, this could mean hundreds of pounds saved annually. For families or business owners, the figure could reach thousands, money that can be reinvested or used for personal goals.
Final Thoughts
Tax allowances are central to efficient financial planning in the UK. From the Personal Allowance to ISAs and pensions, there are multiple ways to cut your tax bill legally and responsibly.
By understanding the rules, planning ahead, and combining allowances with tax reliefs, you can significantly improve your financial position. Making the most of tax allowances UK isn’t just about saving money today—it’s about creating long-term financial security.
