Taxable vs Non-Taxable Income (in the UK)

Not all income are created equally. We all think it is good when receiving money but there are different ways to receive it. The most common way to receive money is by earned income i.e. we earn income by exchange of value. The other way is if you sell some assets, for example if you sell a property or car and it is not regular, then it is a capital gain. These two are very common forms of income and with any type of income you will need to pay income tax. However, there are certain types of income that you do not need to pay tax on.

Tax-free Income

Rental Properties: If you have just started to rent out a property and by the end of the tax year you only receive less than £1,000 of earned income from the rental property then you do not need to declare that amount. If you have your own property and rent out your spare room and receive rental income, there is a Rent A Room Scheme where you can earn up to £7,500 for the year without having to declare the income. If you jointly let a property as a couple, you will share the £7,500 allowance, i.e. £3,250 each.

Self-employed: If you are self-employed, you don’t have to declare your self-employment income if earning less than £1,000. But you may still find beneficial to fill in a tax return if you receive less than £1,000 in sales but you have a lot of expenses, as you can use a trading loss to offset your earned income.

Interest from ISA Accounts: When you earn interest in an ISA account you do not have to worry about the tax as well because you are in an ISA wrapper and that protects you from income tax. If you have a stocks and shares ISA then that protects you from capital gains tax as well. In 17/18, you have an allowance of £20,000 to invest into the ISA, the allowance will be different each year.

Capital Gains Tax: In terms of capital gain, you do have annual exemption. If you make capital profit of less than £11,300, which is the annual exemption in the current tax year, you do not have further capital gains tax burden.

Dividends: Dividend allowance is still £5,000 in current tax year, but it will decrease to £2,000 in the next tax year. However, if you invested in Venture Capital Trust and receive dividends from that, the dividends are tax-free.

Some misconceptions

1. Receiving Health Insurance: In most cases, receiving health insurance is not a tax-free perk. By the end of the year, the company will report the benefit in kind via P11D, which means you would need to pay tax on.

2. High-Income Child Benefit Charge: At the moment, most people may overlook the fact that there may be a tax charge when receiving child benefit, i.e. High Income Child Benefit Charge. This means that if one of you is earning more than £50,000 a year then you start getting charged. You would need to fill in a tax return to declare this and report the tax charge.

3. Forex Trading: Some people say Forex trading is tax free, but it depends on the type of activity. It can be treated as trading like normal earned income, capital gain or just gambling. If you are entering a Forex betting contract, that is just spread betting, then that might be something that you may not have to pay tax for. If it is normal trading where you buy and sell currency then that is more like a capital transaction. If you make a profit of less than £11,300 for the year then you do not have to pay tax on your gain.

4. Receiving Cash from Parents: Normally, this is just a cash gift and you do not need to worry about the tax. In some cases, there may be inheritance tax implication if parents give cash gifts and died within 7 years. However, there is £3,000 annual gift allowance that is free from inheritance tax. Also if you get a cash gift at your wedding, then your parents can give you up to £5,000 that is exempt from the inheritance tax. If it is from your grandparents then the amount that they can give and would be exempt is £2,500. Borrowing money is not an income as you are not exchanging value on that and eventually you would have to pay it back.

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For more details of the tax breaks and tailored advice, please get in touch with the author of this article!

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