Making the most of your tax free allowances
If you’re a basic rate taxpayer you are now also able to earn up to £1,000 in savings income tax-free. Higher rate taxpayers are able to earn up to £500. This is called the Personal Savings Allowance. In addition, there is now a 0% starting rate band for savings of £5,000. This means that if your total taxable income is £17,000 or less you won’t pay any tax on your savings income and, as a consequence, you will notice that banks and building societies are no longer deducting tax from your account interest. However, if your savings income exceeds these the allowances then lower rate taxpayers pay 20% on savings income and higher rate taxpayers 40%. This might mean that you will be required to tell HM Revenue & Customs about any savings income you receive and pay any tax due via the submission of a self assessment tax return or have it deducted via PAYE through an adjustment in your tax code.
From 6 April 2016, the notional 10% tax credit on dividends has been abolished. However, from that date, a £5,000 tax free dividend allowance has been introduced. Dividends above this level are taxed at 7.5% (basic rate), 32.5% (higher rate), and 38.1% (additional rate). For individuals who are basic rate payers and who receive dividends of more than £5,001 this means that, once again, they may now be required to complete and submit a self assessment tax return to HMRC.
Savings plans such as ISAs, which are already tax-free, remain unaffected by the new rules. From 6 April 2016, the annual limit has been set at £15,240. This can all be put in a cash Isa, all in a stocks and shares Isa, or split between both cash and stocks and shares.
The new rules mean that you could in theory have income of up to £22,000 tax-free by utilising the personal allowance of £11,000, the 0% starting rate for savings of £5,000, the personal savings allowance of £1,000 and the dividend allowance £5,000. In addition, you can still make use of ISAs to generate tax free returns. With careful tax planning and careful apportionment of investments between spouses, husbands and wives can each take advantage of the tax free allowances and nil rate savings band so that, as a couple, you could earn £44,000 tax free. If you and your spouse run your own business through a company then it should be possible to take maximum advantage of the new rules by controlling the amount and split of drawings between salary and dividends.
A further relatively little known allowance, available to married couples and civil partners, is the Marriage Allowance which lets you transfer £1,100 of personal allowance from the lower-earning partner to the higher earner, saving them up to £220 in tax. However, this is only available if the higher earner is a 20% taxpayer – no transfer is possible if they are a 40% taxpayer.
Finally, remember that capital gains in the 2016-17 tax year under £11,100 are tax-free. Married couples and civil partners who own assets jointly can claim a double allowance of £22,200. From 6 April 2016, Capital Gains Tax is charged at 10% if you are a basic-rate taxpayer (except on residential property gains, where the rate is 18%) and 20% if you pay tax at a higher rate (except on residential property gains, where the rate is 28%). Gains arising on the disposal of your principle private residence remain exempt.
Your tax position will ultimately depend upon your own circumstances, your total income and what makes up your income so it is important for you to seek advice in order to take maximum advantage of the new rules. If you would like to learn more about making the most of your tax free allowances then please contact us.