Is Capital Gains Allowance In Addition To Personal Allowance?

Like most people, you probably have many questions about capital gains tax and personal allowance. What is it? How does it work? Find out the answers to all these questions and more in this article!

What is the Personal Allowance?

If you ask most people what the personal allowance is, they will probably tell you that it is the amount of money that you are allowed to earn before you have to start paying income tax. And while that is technically true, there is a lot more to it than that.

Income Tax is a complex beast, and the personal allowance is just one small part. The personal allowance is the amount of money you are allowed to earn before you start paying income tax, but it is not the only thing that determines how much you will pay. Other factors, such as your tax code and your taxable income, also come into play.

The personal allowance is also not a static number. It changes every year, in line with inflation. For example, in the 2020/2021 tax year, the personal allowance is £12,500. This means you can earn up to £12,500 before paying income tax.

However, it’s important to remember that the personal allowance is not a free pass to earn unlimited money without paying taxes. You will still have to pay income tax if you earn more than £12,500 in a year.

What is Capital Gains Allowance?

Capital gains allowance is a tax relief that allows you to keep more money when you sell certain assets, such as shares or property. The amount of allowance you can claim depends on your tax band. For example, if you’re a basic rate taxpayer, you can claim £11,100 of capital gains before paying any tax. If you’re a higher rate taxpayer, you can claim £5,500. You can find out more about how capital gains allowances work here.

How do the two work together?

So, what happens if you have both kinds of income, i.e. capital gains tax and personal allowance, in a year? The short answer is that your capital gains are first deducted from your personal allowance, and only the amount above is taxed at the capital gains rate.

For example, let’s say your personal allowance is £12,000, and you make £5,000 from selling assets. In this case, only £3,000 of your capital gains would be subject to tax (at the current rate of 10%). The other £2,000 would be tax-free.

Of course, there are always exceptions and complications when it comes to capital gains tax personal allowance, so it’s always best to speak to our accountant or financial advisor if you have specific questions about your situation.