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What is a 'tax year' and does it affect you?

Reading time: 5 minutes
Scottish FriendlyFebruary 29, 2024

What is a ‘tax year’?

In the UK, a tax year is simply a 12-month period that runs from 6th April to 5th April the following year.

HMRC looks at this timeframe to work out how much tax you should pay. Your tax allowances, such as your personal allowance and ISA allowance, restart at the beginning of the tax year.

Who does the tax year affect?

The tax year affects everyone who pays tax. If you are employed, you won’t need to do anything different when a tax year ends and a new tax year starts – you’ll continue to ay tax as normal.

For those employed in the UK, you are not required to work out how much tax you’re due to pay. However, if you’re self-employed or have additional, taxable income, a changing tax year may affect you differently.

For those who are self-employed, you are required to complete your own tax return which lets HMRC know how much your income was for the respective tax year and therefore how much tax you should pay. You pay income on your trading profits - the amount of money left after you have deducted business-related expenses.

For those who have an ISA or tax-exempt savings plan, some savings and investing products have a limit to how much you can pay in. This limit resets at the start of a new tax year (6th April).

Some savings and investment products have a limit to how much you can pay in, and this limit resets at the start of the new tax year (6 April). This limit exists because you don’t pay tax regardless of how much money these products may make you, for example through interest. The reason that the government allows you to save up to the allowance limit without charging any tax is to enable every-day savers to put money away for their future.

If you have an ISA, it is important to note that your ISA will not close when the tax year finishes, and you can continue to keep your savings on a tax-free basis for as long as you keep the money in your ISA account.

Tax-free means the investment grows free from tax, with the exception of any tax we’ve already paid on your behalf (for example on dividends from UK shares).

How can savers be tax-year savvy?

Most people will be looking for ways to make the most of tax-free saving and investing. To do this, it makes sense to be aware of when the tax year restarts so you can save or invest as much money tax-free as you can each year.

Every tax year, you can save up to £20,000 in one account of split the allowance across multiple accounts. This includes any Lifetime ISA contributions however you can only pay into one Lifetime ISA in a tax year and the maximum you can pay is £4000. If you manage to reach the £4,000 allowance limit by the end of the tax year, you’ll get the maximum available government bonus, which is £1,000. You can’t carry any unused limit into the next year so any government bonus you miss out on will be permanently lost.

If you’ve reached the ISA limit for the year, you have the option of looking at opening another tax-exempt savings plan. This can be opened in addition to your ISA and is a way to effectively increase your tax-free allowance.

While it is not always possible to save right up to the allowance limit, it is important for ISA owners to be aware of it and to understand how the tax year affects how much you can save. If you do come into a lump sum – perhaps through inheritance or a work bonus – this information can help you work out when, and where, to invest it.

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