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In this article, you will learn about the threshold of tax-free income and allowances also various tax reliefs that you are legally entitled to and how these allowances can increase your tax-free threshold. Lets explore some common questions in your mind related to UK tax reliefs, tax-free income and allowances.
How to reduce your UK tax legally?
Should I always pay tax on my income?
No! You will only pay tax on your income if it exceeds the threshold of the Personal Allowance.
This tax free threshold is dubbed as Tax free Personal Allowance by the tax authorities. For the year 2025-26, the standard tax free personal allowance stands at £12,570. It means that if your income is below £12,570 then HM Revenue & Customs will not charge you any income tax.
It is pertinent here to mention that your basic personal allowance can increase if you’re entitled to various claims and reliefs, and this article deals with the very same topic. So, stay with us to get your tax bill reduced!
What’s the difference between tax allowances and tax reliefs?
Both these terms serve the very same purpose, i-e they reduced your tax bills and save your hard-earned money. But there’s a difference between the two that you must know.
Key Difference Between Tax Allowances And Reliefs
|
Tax Allowances |
Tax Reliefs |
|
Set amount of tax-free income (e.g., £12,570 Personal Allowance) |
Reduces tax on money spent (e.g., pensions, charity) |
|
Automatic (if eligible) |
Often requires a claim (e.g., via Self Assessment) |
|
Applies to income (wages, savings, dividends) |
Applies to spending/investments (pensions, donations) |
Example
- Allowance: You earn £15,000 → Only £2,430 (£15,000 – £12,570) is taxed.
- Relief: You pay £8,000 into a pension → Government adds £2,000 (20% tax relief).
Tax allowances entitle you to earn a certain sum of cash before paying the income tax. In simple words, tax allowances increase the threshold of tax-free income and hence the limit of your personal allowance.
UK Tax Allowances and Thresholds 2025/26
| Allowance | Amount | Notes |
|---|---|---|
| Tax-free Personal Allowance | £12,570 | The threshold remains valid if your income does not exceed £100,000. For income above £100,000, you lose £1 of personal allowance for every £2 earned. |
| Married Couple’s Allowance (MCA) | £10,710 (max) £4,170 (min) | Available only if at least one spouse was born before 6 April 1935. Maximum Allowance: £10,710 (provides up to £1,071 tax relief at 10%). Minimum Allowance: £4,170 (provides £417 tax relief). |
| Dividend Allowance | £500 | Tax-free allowance for dividend income. |
| Savings Allowance | Basic-rate: £1,000 Higher-rate: £500 Additional-rate: £0 | Tax-free interest allowance based on your tax band. |
| Blind Person’s Allowance | £3,070 | |
| Capital Gains Tax (CGT) Annual Exempt Amount | £3,000 | Reduced from £6,000 in 2023/24. |
| Inheritance Tax (IHT) Thresholds | NRB: £325,000 RNRB: £175,000 Combined: £500,000 | Nil-Rate Band (NRB): No IHT on estates below £325k (frozen until 2028). Above this, 40% tax applies unless exemptions apply. Residence Nil-Rate Band (RNRB): £175k for passing a home to direct descendants. Combined tax-free threshold is £500k (£325k NRB + £175k RNRB). Tapering: Lost at £1 for every £2 over £2m estate value. |
Tax relief reduce your taxable income or give you back some of the tax you’ve already paid. They apply to specific expenses or contributions.
UK Tax Reliefs
Common Tax Reliefs |
(2025/26) |
|
Pension Tax Relief: |
|
|
Charity Donations (Gift Aid) |
|
|
Work Related Expenses |
Uniforms, professional fees, or tools (if not reimbursed by employer). |
|
Venture Capital Schemes (EIS/SEIS) |
Up to 30-50% income tax relief on investments in startups. |
What if my Income exceeds the £100,000 threshold?
If your income exceeds the £100,000 threshold, then you lose £1 of your personal allowance for every £2 that you earn above £100,000, no matter what is your age. It translates into a complete waiver of personal allowance when your income reaches or exceeds the £25,140 threshold.
In laymen’s terms, when your income reaches or exceeds the £25,140 threshold, it means you’ll be no longer entitled to any personal allowance, and the whole of your income will be taxed.
Scotland: Same taper rules, but tax rates differ (e.g., 42% Higher Rate).
Am I eligible for a marriage allowance?
If you are in a civil partnership or legally married, then you can get tax relief under “marriage allowance”.
To claim marriage allowance, the low earner spouse can transfer as much as £1,260 of his/her personal allowance to a higher-earner partner. The higher earner must be a basic-rate taxpayer (taxable income ≤ £50,270 after the transfer).
This transferred amount is then deducted from the net amount of tax that a higher-earner usually pays.
To be eligible for a marriage allowance, the income of the lower-earner must be less than the basic allowance that is £12,570 for the ongoing tax year.
Example:
- Lower earner (income £10,000):Keeps £11,310 of their Personal Allowance (£12,570 – £1,260 transfer).
- Higher earner (income £45,000):Receives an extra £1,260 tax-free, reducing taxable income to £43,740.
- Saves £252 in income tax.
How to Claim:
- Apply online via HMRC’s Marriage Allowance service.
- Backdate claims up to 4 years if eligible.
Exceptions:
- Scotland: Same rules, but basic-rate threshold ends at £43,662.
- Pensioners: Eligible if one partner is below State Pension age.
Note: If the higher earner’s income is just over £50,270, consider pension contributions to reduce taxable income and qualify.
Personal Allowance
Personal allowance means that you can earn a specific sum of money from interest on savings every year. The threshold varies for each tax slab.
2025/26 Personal Allowance Amounts
|
Tax Band |
Income Threshold |
Tax-Free Savings Interest |
|
Basic-rate taxpayer |
Up to £50,270 |
£1,000 per year |
|
Higher-rate taxpayer |
£50,271 – £125,140 |
£500 per year |
|
Additional-rate taxpayer |
Over £125,140 |
£0 allowance |
There’s no such relief if you are an additional rate taxpayer.
All payments regarding savings interest will be gross. It means that your building society or bank cannot deduct tax on savings interest anymore.
All interest from savings will be paid gross, which means tax will no longer be deducted by your bank or building society.
You are authorised to use your personal savings allowance on interest earned from:
- Peer-to-peer lending interest
- Corporate or government bonds
- Interest distributions, i-e income from authorised unit trusts, bond trusts, investment trusts, and income from open-ended investment companies.
Tax Calculation Examples:
- Basic-rate taxpayer with £1,200 savings interest:
✓ £1,000 tax-free under PSA
✓ 20% tax on £200 = £40 tax due - Higher-rate taxpayer with £700 savings interest:
✓ £500 tax-free under PSA
✓ 40% tax on £200 = £80 tax due
HM Revenue & Customs will tax income arising from loan-based investments as interest whereas it will tax profits emanating from equity firms as dividend income.
Note: HMRC receives automatic reports of your savings interest – always declare excess interest to avoid penalties.
Dividend Allowance
Dividend allowance is among many tax-free income and allowances through which you can increase your tax-free threshold.
- Tax-free dividend allowance: £500 (reduced from £2,000 in previous years).
- Taxable dividends: Any amount above £500 (frozen until 2028) is subject to dividend tax rates.
Dividend Tax Rates (2025/26)
|
Tax Band |
Income Threshold |
Dividend Tax Rate |
|
Basic-rate |
Up to £50,270 |
8.75% |
|
Higher-rate |
£50,271 – £125,140 |
33.75% |
|
Additional-rate |
Over £125,140 |
39.35% |
Example Calculation:
Dividend income: £5,000
- Tax-free: £500
- Taxable: £4,500
Basic-rate payer: £4,500 × 8.75% = £393.75 tax due
Read More:
Blind Person Allowance
If you, your spouse, or civil partner have severely impaired eyesight, or you are partially or fully blind, then the threshold of your tax-free income or personal allowance increases.
Under the blind person allowance, you get another £3,070 (increased from £2,450 in 2019/20) and your basic personal allowance soars to £15,640. For the tax year 2024-25, the threshold of blind person allowance was £3,070.
Fortunately, the blind personal allowance works the same way as does the marriage allowance. It means that if your income is less than the personal allowance, then you are allowed to transfer unused allowance to your civil partner or spouse.
If you’re living in Wales or England, then to be eligible for blind person allowance, you are required to first get yourself attested as blind. After getting the certification of the blind, you need to appear on the register of the local authority to claim relief.
When it comes to Northern Ireland or Scotland (tax-free income and allowances), you will be eligible to claim relief under a blind person allowance even if you are not certified. But authorities need to ensure that you cannot perform those tasks that involve eyesight.
Property and Trading allowances
Trading allowance is for those individuals who earn cash through trading activities. For the first £1,000 generated from these activities, there will be no tax.
Also, if you make money up to £1,000 from your property, you won’t be charged any tax. This may include renting out a room for very short durations or renting out portions for events.
However, if your rental income is significantly more than £1,000, then you’ll be charged tax.
Note: You can claim property and trading allowances simultaneously.
Conclusion
Keeping yourself abreast of all these tax reliefs, tax-free income and allowances is a herculean task, something that is impossible for a layman. But by keeping records of these allowances and reliefs, one can save a significant portion of his hard-earned money and can get his tax bill reduced legally.
The solution lies in seeking the services of a reliable tax firm like IBISS&CO. These guys are in the business for over a decade now and with a combined experience surpassing 25 years, IBISS&CO has already served thousands of happy clients, the testimonials of which are available on the website.
IBISS&CO have helped their customers in the reduction of their tax bills. They can do the same for you. Just contact them to save your hard-earned money.
