What Counts as Tax-Free Income? A Guide to Understanding What Qualifies in the UK

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At Crunch we know how hard both self-employed and employed people work. And you deserve to pocket every single last penny of the money you rightfully earn. 

But if you don’t know what counts as tax-free income then you could be missing out big time. Either by not taking advantage of potential sources of tax-free income, or paying more tax than you should - as 75% of self-employed people do!

Our awesome Self Assessment service can help with that btw : )

What does tax-free income mean?

Exactly what it says on the tin - it’s income that you don’t have to pay any tax on. HMRC permits the British public to earn tax-free income in the form of certain ‘allowances’ and tax reliefs.

  • An allowance is an amount of money you can earn tax-free
  • A relief is a tax reduction you claim from HMRC - either by paying less tax or having tax repaid 

In this article we’ll help you make sure you get your fair share.

Income Tax rates and bands

Before we examine the full list of tax-free income sources, let’s quickly look at a basic overview of the standard UK tax rates. So you can use them to gauge the value of tax-free income/allowances.

Tax Band Name Taxable Income Tax Rate
Personal Allowance Up to £12,570 (Not claimable when you earn over £125,140) 0%
Basic rate £12,571 to £50,270 20%
Higher rate £50,271 to £125,140 40%
Additional rate over £125,140 45%

*Figures taken from HMRC website

As you can see, everyone who earns over £12,570  whether they are employed or self-employed is entitled to a£12,570 of tax free income as a personal allowance.

You can see a more detailed breakdown of tax rates and thresholds for 2023 and 2024 in this article. To calculate your income tax, as well as  other kinds of tax, try our super handy free tax calculators.

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Tax-free Allowances in the UK

Type of Allowance Who is eligible? What can you claim?
Trading Allowance Self-employed individuals Tax exemption of up to £1,000 a year income from trading.
Property Allowance Individuals that earn income from property (Each co-owner of a jointly held property is entitled to their own £1,000 allowance, applicable to their portion of the total gross rental income.) Tax exemption of up to £1,000 a year on income from land or property.
The Rent a Room Scheme Individuals that are resident landlords (you don’t need to own your own home), or run a BnB/guesthouse. Up to £7,500 per year tax-free from letting out furnished accommodation in your home.
Capital Gains Tax Allowance Individuals that earn income from selling assets. £6,000 tax-free on income from capital gains.
Marriage Allowance Your income is below your Personal Allowance (usually £12,570), and your partner is a basic-rate payer. Ability to transfer £1,260 of your Personal Allowance to your husband, wife, or civil partner. Which reduces their tax by up to £252.
Dividend Allowance Any individuals that own shares in a company. £1,000 tax-free on income from dividends *Shares in ISAs are dividend tax-free
Savings Interest Allowance Basic and higher rate taxpayers Up to £1,000 tax-free on income from interest on savings *(up to £5000 if you earn less than £17,570)

*Figures taken from HMRC website

There’s quite a lot of fine details regarding eligibility and thresholds for tax allowances, so we recommend reading more about this on HMRC’s webpage for tax rates and allowances.

Tax reliefs on income

There are many kinds of tax relief available for self-employed and employees in the form of expenses. But it’s specifically tax-reliefs you can claim on income we are looking at here.

Pensions Contributions

Did you know you can secure your future while saving on taxes? Contributions to your pension scheme are a financial savings double whammy - you're preparing for a comfortable retirement and reducing your taxable income at the same time. 

How? Well, contributions to your pension are tax-free up to £40,000. The relief will be applied automatically if you are an employee, or you will need to claim yourself if you are self-employed.

Charitable donations

Giving back not only feels good, but it also comes with tax benefits. Donations to charity through Gift Aid allow the charity to claim an extra 25p for every £1 you donate. 

And if you're a higher or additional rate taxpayer, you can claim the difference between the rate you pay and the basic rate on your donation. It's a win-win – you support a cause close to your heart, and you reduce your tax bill.

SEIS investing

For the savvy investors out there, the Seed Enterprise Investment Scheme (SEIS) is something to look into. Designed to help small, early-stage companies raise equity finance, SEIS offers some enticing tax reliefs for investors. 

When you invest in a qualifying company, you can claim up to 50% of your investment as income tax relief. Plus, there are benefits like capital gains tax exemption on profits earned from the shares. Investing in startups can be risky, but the tax relief is a tempting cushion

Other types of tax-free income

Child Maintenance Payments

If you pay or receive maintenance you can ‘apply for a variation’ to ask for expenses, income and assets to be taken into consideration. This can reduce the amount you pay, or increase the amount you receive - depending on which party you are. These include:

Expenses: Includes costs like debt repayments from past relationships and costs for maintaining regular contact with a child you support (such as travel expenses).

Income and Assets: Such as rental income exceeding £2,500 annually or any income the paying parent diverts to avoid inclusion in the maintenance calculation (like transferring it to others or opting for company benefits over higher salary).

Benefits

Some government benefits are free from the grip of taxes. These include specific allowances like Disability Living Allowance, Child Benefit, and others. Not all benefits are tax-free, but several key ones leave more money in your pocket.

Premium bond prizes 

Premium bond prizes from NS&I are entirely tax-free. It’s like a lottery where instead of spending, you're saving. Your investment stays safe while you stand a chance to win tax-free prizes from 1 -25 million pounds. A fun and potentially rewarding way to save!

National Savings and Investments (‘NS&I’) 

NS&I offers tax-free savings certificates and Children's Bonus Bonds. The interest you earn on these bonds won't attract tax, making them a secure and worry-free investment for your future or your children's. It's a safe haven for your savings with a tax-free guarantee.

Seizing Tax-Free Income Opportunities

Understanding what qualifies as tax-free income in the UK can significantly benefit both self-employed and employed individuals. From personal allowances and property exemptions to pension contributions and charitable donations, there are numerous opportunities to maximise your earnings while minimising tax liabilities.

If you're a self-employed sole trader, freelancer or side-hustler Crunch, can help you ensure you get every possible benefit of tax-free income. As we already have for over 50,000+ satisfied clients.

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James Waller
Content Specialist
Updated on
November 29, 2023

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