The UK tax system is complex, but within that complexity are dozens of allowances designed to shelter your money from tax. Most people use their personal allowance without thinking about it, but many miss out on ISA allowances, the Personal Savings Allowance, dividend allowance, capital gains exemption, and other reliefs. Here's a complete guide to what's available.
Personal Allowance
The first £12,570 of income is tax-free. This applies to employment income, self-employment income, pension income, and most other income sources. If you earn over £100,000, the allowance reduces by £1 for every £2 above £100,000, disappearing entirely at £125,140. Make sure your tax code is correct (usually 1257L) — an incorrect code means over or underpayment.
ISA Allowance
You can save or invest £20,000 per tax year in ISAs. All interest, dividends, and capital gains within ISAs are completely tax-free — forever. This is one of the most valuable allowances in the UK tax system. Over decades, ISA savings can grow to hundreds of thousands of pounds, all sheltered from tax. Use it or lose it — unused ISA allowance doesn't carry forward. Types: Cash ISA, Stocks and Shares ISA, Innovative Finance ISA, Lifetime ISA. From 6 April 2027, under-65s can put at most £12,000 a year of the £20,000 into Cash ISAs.
Personal Savings Allowance
Basic-rate taxpayers can earn £1,000 in savings interest tax-free. Higher-rate taxpayers get £500. Additional-rate taxpayers get nothing. This is separate from and in addition to your ISA allowance. If your savings interest exceeds the PSA, you'll pay tax on the excess at your marginal rate. With interest rates well above their 2010s lows, this matters more than it used to — a basic-rate taxpayer with £25,000 in savings at 4% earns £1,000, using the entire PSA. Savings income above the allowance will also be taxed 2 percentage points higher from 6 April 2027 (22%, 42% and 47%).
Dividend Allowance
The first £500 of dividend income per year is tax-free (reduced from £1,000 in 2023/24 and £2,000 in 2022/23). Above that, dividends are taxed at 10.75% (basic), 35.75% (higher), or 39.35% (additional) from 6 April 2026. If you hold shares outside an ISA, this allowance shelters a small amount of dividend income. For most people, holding dividend-paying investments inside an ISA eliminates dividend tax entirely.
Capital Gains Tax Exemption
The annual CGT exemption is £3,000 for 2026/27, with gains above it taxed at 18% (basic rate) or 24% (higher and additional rate). Gains on assets (property other than your main home, shares, cryptocurrency, valuable items) below this threshold are tax-free. Use the 'bed and ISA' strategy: sell investments outside an ISA up to the annual exemption, then repurchase within an ISA. This crystallises gains tax-free and moves assets into a tax-free wrapper for future growth.
Other Allowances You Might Be Missing
Several other tax-free allowances are commonly overlooked:
- Marriage Allowance: Transfer £1,260 of unused personal allowance to your spouse. Worth £252/year. Backdate up to 4 years.
- Trading Allowance: £1,000 of self-employment income is tax-free. Covers small side hustles without needing to file a return.
- Property Allowance: £1,000 of property income is tax-free. Covers small rental income.
- Rent a Room Scheme: Up to £7,500/year tax-free from renting a furnished room in your home.
- Pension Annual Allowance: Contribute up to £60,000/year (or 100% of earnings) to pensions with tax relief. Carry forward unused allowance from the previous 3 years.
- National Savings Premium Bonds: All prizes are completely tax-free, regardless of amount.
FAQ
Do I need to claim these allowances?
Most are automatic (personal allowance, PSA, dividend allowance). ISAs require you to open an account and contribute. Marriage Allowance requires an online application. CGT exemption is automatic but you need to sell assets to use it.
Can a married couple double their allowances?
Each person has their own ISA allowance (£20,000 each = £40,000/year for a couple), PSA, dividend allowance, and CGT exemption. Plan your finances to use both sets of allowances — hold savings in the name of the person who benefits most from the tax shelter.
Are these allowances changing?
Allowances change with government budgets. The personal allowance is frozen at £12,570 until April 2031. The dividend and CGT allowances have been reduced significantly in recent years. Stay informed through the annual Budget announcements.
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