At Crunch, we know how hard you work, whether you are self-employed or an employee. You deserve to keep every penny of your hard-earned money.

However, tax-free income in the UK is not as straightforward as it might first appear. It depends on how you earn, how much you earn, and which HMRC rules apply to your situation. 

You might be missing out on allowances you’re entitled to, or paying more tax than necessary without realising it. In fact, we see many self-employed people overpaying tax every year before joining Crunch.

What does tax-free income mean?

Exactly what it says on the tin - tax-free income is typically referred to as income that is not subject to Income Tax. However, whether something is tax-free depends on HMRC rules, allowances, and your overall income position.

HMRC allows tax-free income in different ways, including:

• Allowances (amounts you can earn before tax applies).
• Reliefs (reductions to your taxable income or tax bill).
• Specific exemptions depending on income type. 

In practice, tax-free income is usually conditional rather than absolute. It’s why it’s a great idea to speak to your accountant to make sure you’re making the most of every penny.

Tax-free Allowances in the UK

*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.

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Income Tax rates and bands

Before we jump into the full list of tax-free income sources, it helps to understand how tax is applied once income goes above allowances. These thresholds determine when tax starts to apply.

*Most people can use the Personal Allowance of £12,570, but whether you get the full amount or not depends on your total income. It is reduced once income goes above £100,000 and removed entirely at £125,140.

You can see a more detailed breakdown of tax rates and thresholds 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 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.

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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 thousands of satisfied clients.