Seven ways to make your saving go further when living costs increase

By Shaun Robson & William Stevens

September 2022

When living costs increase, our focus often shifts from saving to meet financial goals, to everyday savings. Fortunately, tax allowances can help balance saving for today with saving for tomorrow.

You likely have some financial targets that seem more difficult to reach now than they did a few years ago. Maybe you are looking to buy a new home, fund private education, or planning to retire early. Regardless of your ambitions, being smart about how you save today can help you meet these goals in the future.

One of the smartest steps you can take today is to consider the tax allowances you may be eligible for as a UK taxpayer*. Looking for ways to reduce your tax bill can free up extra funds for savings and leave you with confidence that you can remain on top of everyday expenses.

Tax allowances for UK taxpayers

For a lot of people, the Personal Allowance on the first £12,570 of their earnings represents the extent of utilising available tax-free allowances.

However, under current legislation it is possible to earn more tax-free in a year.

Here are seven ADDITIONAL tax allowances you may be eligible for that can help with saving towards those financial goals:

Capital Gains exempt amount – £12,300

You are entitled to £12,300 in tax-free profit from the sale of assets, and an exemption applies for assets transfers between spouses. This allows one spouse to move investments into their partner’s name tax-free (with no limit) for that spouse to sell them using their own exemption.

This exemption represents a clear advantage to holding liquid assets, such as company shares, as assets can be easily managed to optimise your overall tax position.

Rent-a-room allowance – £7,500

If you put a furnished room in your main residence up for rent, the first £7,500 of rental income will be tax-free.

However, it must meet qualifying conditions and you would not be able to claim landlords’ expenses from your tax bill (e.g. for renovations) in tax years where you also claim this allowance. You would instead choose between the two each year.

Starting rate for savings – £5,000

If your total income (excluding savings and dividend income) is less than the Personal Allowance of £12,570, you can earn up to £5,000 in interest on tax-free savings. This can also be applied to government and corporate bond income.

If your total income is between £12,570 and £17,570, the amount of interest you can earn on tax-free savings will taper towards zero as your income increases.

Dividend allowance – £2,000

You are entitled to earn your first £2,000 of dividend income tax-free. Above this threshold, dividends are taxable at lower rates than those applicable to other sources of income (e.g. rental income), which means that taxable dividends can be more tax-efficient.

Property allowance – £1,000

Any income earned from a property, land, buildings or even a parking space benefits from a £1,000 tax-free allowance.

Again, you will need to choose between claiming expenses or the allowance.
Additionally, it can’t be combined with the rent-a-room allowance, which only applies for income earned through your main residence.

Trading allowance – £1,000

You do not have to declare earnings from a secondary trade, which could be anything from babysitting to selling crafts online if they are under £1,000.

Personal Savings Allowance – £1,000 / £500

Interest earned on cash savings is not usually taxed due to the Personal Savings Allowance of £1,000 applying for non or basic rate taxpayers, and £500 for higher rate taxpayers. Additional rate taxpayers are not eligible for this allowance.

As you can see, UK taxpayers can make some considerable savings by taking advantage of these allowances, which can free up extra funds for savings and leave you with confidence you can remain on top of everyday expenses. In addition to these allowances, UK taxpayers can benefit from tax wrappers and other exemptions depending on their circumstances. While your focus may currently be on everyday savings, working with a Wealth Planner can help you chart a path to meet those financial goals and help you remain on track with your savings.

For personalised advice around making your savings go further, chat with a Wealth Planner.

* Please note, the tax treatment depends on the individual circumstances of each client and may be subject to change in the future.