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How do I work out my tax?

Basics

 

You can work out your tax by following these four stages:

1.Work out whether your income is taxable or not.

Some income is taxable and some is tax-free. See our page ‘What income is taxable’ for more information.

2. Work out the allowances you can deduct from your taxable income or your final tax bill.

There are several different tax allowances to which you might be entitled.

Every man, woman and child in the UK has a ‘personal allowance’. For 2016/17 the personal allowance for everyone (on incomes below £100,000) is £11,000.

There is also a blind person’s allowance for those who qualify. Despite its name, you do not have to be completely without sight to claim it, so if you have very poor eyesight, check if you could be entitled.

Higher age-related personal allowances might be available in previous years depending on when you were born. It is worth checking that you claimed them if you were born before 6 April 1938. If you are part of a married couple or a civil partnership and either you or your spouse or partner was born before 6 April 1935, a married couple’s allowance might be available. Finally the marriage allowance, available to married couples and civil partners who are basic rate taxpayers where one of them has unused allowances.

You can find out more information on these allowances on our page ‘what tax allowances am I entitled to?’

3. Work out at what rate your income is taxed.

If you qualify,  some  savings income might be taxed at 0%. The rules for savings income change on 6 April 2016.

Dividend tax is also changing on 6 April 2016. A £5,000 allowance will be available and only amounts above this allowance will be taxable at your marginal rate. If you are a basic rate taxpayer 7.5%, higher rate 32.5% and additional rate at 38.1%.

Next, there is the basic rate band, where most types of income are taxed at 20%. Most people are within the basic rate band.

But for people with higher levels of income, 40% and 45% tax rates can also apply.

See our section ‘what tax rates apply to me?’ for more detail.

4. Finally, consider whether you can deduct anything from your final tax bill.

The most common deduction is tax you have already paid, either in the UK or overseas.
But take care: some deductions might not be allowed and some tax is not refundable, for example, the tax credit on UK dividends.

Example calculation
To work out your tax, you have to do the following calculation:

  • First, take your allowances from your income to work out your taxable income.
  • Second, HM Revenue & Customs charge tax on your taxable income using the rates of tax that apply to you. The tax rates are set each year.

For most individuals with simple tax affairs the way the tax calculation works is as set out below. The tax year runs from 6 April one year to 5 April the next. Negative or minus numbers are shown in brackets.

£
Income – most income is taxable although some may be tax free xxxx
Take off your tax allowances xxxx
You are left with the amount of your taxable income xxxx
Calculate your tax liability using the tax rates that apply to you xxxx
Take off the amounts you get due to any special allowances xxxx
Take off any tax already deducted from the income you receive before you get it xxxx
Tax now due or (repayable) xxxx or
(xxxx)

So if you have a job earning £290 a week, you are single, your 2016/17 tax calculation would probably work out like this, using the table above:

£
Income – wages: £290 a week x 52 weeks 15,080
Take off your personal allowance (11,000)
You are left with the amount of your taxable income:
£15,080 – £10,600
4,080
Calculate your tax liability:
£4,480 x 20%
816
Take off the amounts you get due to any special allowances (None)
Take off any tax already deducted from the income you receive before you get it:
This depends on the PAYE code used for your wages but here we assume you were on the correct code for the whole tax year
(816)
Tax now due or (repayable) £ 0

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What income is taxable?

You do not have to pay tax on all of your income. In tax terms, some income is called ‘taxable’ – you have to pay tax on it, and some is ‘non taxable’, ‘not taxable’, ‘exempt’ or ‘tax free’ – you do not have to pay tax on it.

If you have income that is not taxable, you do not normally need to tell HM Revenue & Customs (‘HMRC’) about it.

It is not always easy to know if a certain type of income is taxable or not. We list the most common types of taxable income and tax free income to help you.

As the tax rules are complex, it has not been possible to include all types of income on this page.

Taxable Income

The following list includes income that is normally taxable.

Earned income

Wages and salaries, including holiday pay, bonuses and tips

Profits from self-employment

Pensions from occupational pensions, private pensions, personal pension plans or retirement annuity policies

90% of foreign pensions and lump sums paid under overseas pension schemes in certain circumstances

One off payments from pension funds

Benefits in kind, which might also be called ‘perks’ of your job. This includes things like company cars and private medical insurance. The tax treatment of benefits in kind sometimes depends on whether you earn £8,500 a year or more.

Redundancy/leaving payments over £30,000

State benefits

The UK Government provides support to people in certain times of need, by way of the state benefits system. Some benefits are taxable, but others are not

The State Pension IS taxable as are Job seekers allowance and Carers allowance.

For a list of state benefits and their tax treatment. Please refer to the state benefits checklist Link to LITRG website http://www.litrg.org.uk/low-income-workers/state-benefits in the ‘tax credits and benefits’ section of the Low Income Tax Reform Group (LITRG) website.

Savings and investment income

Bank or building society interest - Also read 'what tax allowances apply to me?'

Dividends from shares or from collective investments such as investment trusts - Also read 'what tax allowances apply to me?'

National Savings and Investments (‘NS&I’) products can cause confusion because some are taxable and some are tax free. Common taxable NS&I products are: Income Bonds, the Investment Account, Guaranteed Income Bonds and Guaranteed Growth Bonds – the interest is taxable, but tax may not be deducted at source.

Interest from savings deposits with credit unions

Purchased annuities - income element

Taxable gains on life assurance policies or investment bonds

UK companies - interest

UK Government stocks, or gilts, interest, for example, Treasury Stock and War Loan Stock

UK unit trusts or Open-Ended Investment Companies, both interest and dividends

Other income

Property letting – most income from renting out a property, including from second properties. You can claim certain expenses against the rents. If you rent out a room in your home, you should read our separate page on ‘rent a room’ relief. Link to 5a

Trust or settlement income

Income paid to the estate of a deceased person

Jurors' financial loss allowance, when the juror is self-employed

Motor mileage allowance profits paid to volunteer drivers.

Pre owned assets – a tax charge which can arise on something you have given away but still retain some interest in, or benefit from

What income is tax free?

The following list includes income that is normally tax free.

Benefits

The UK Government provides support to people in certain times of need, by way of the state benefits system. Some benefits are taxable, but others are not. Importantly, tax credits and pension credits are not taxable income and neither is Universal Credit.

For a list of state benefits and their tax treatment. Please refer to the state benefits checklist Link to LITRG website http://www.litrg.org.uk/low-income-workers/state-benefits in the ‘tax credits and benefits’ section of the Low Income Tax Reform Group (LITRG) website.

Non-savings income

Foreign pensions and lump sums paid under overseas pension schemes in certain circumstances – 10% of the pension or lump sum is tax free

Foreign social security benefits – a large number are exempt

Friendly Societies – any gains on qualifying insurance policies

Gallantry awards – annuities and additional pensions paid to holders of the Victoria Cross, George Cross and most other gallantry medals

Insurance benefits paid to a person who is sick, disabled or unemployed, to meet her/his financial commitments. These include benefits paid under mortgage protection insurance, permanent health insurance, payment protection, or credit, insurance and long-term care insurance

Life Assurance policies – certain bonuses and profits

Local authority home improvement grants

Lottery, football pools and other betting winnings, for example, from horse racing

Lump sums from UK approved pension schemes up to 25% of the capital value – note that part of 'trivial commutation' lump sums above the 25% limit are taxable

Maintenance payments following divorce or separation

Disability pensions of members of the armed forces are tax free. Any pension awarded to an employee on retirement because of an injury at work is free of tax.

Premium Bond prizes

Purchased annuities – capital element of amount received

Renting out a room in your own home – you should read our separate page on ‘rent a room’ relief link to 5a as part of the income may not be taxable

Repayment supplement (interest) in connection with overpaid tax

Wounds and disability pensions

Some savings and investments income sources

National Savings and Investments (‘NS&I’) – interest on Savings Certificates and Children’s Bonus Bonds

Individual Savings Accounts (‘ISA’) income

Insurance policies or investment bonds – withdrawal tax free up to 5% of the amount originally invested

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What tax allowances am I entitled to?

Allowances explained below;

  • What are tax allowances?
  • What is the personal allowance?
  • What is the age-related personal allowance?
  • What is the starting rate for savings and the personal savings allowance?
  • What is the dividend allowance?
  • What is the marriage allowance?
  • What is blind person’s allowance?
  • What is married couple’s allowance?
  • Can I transfer my allowances to my spouse or civil partner?

What are tax allowances?

Most tax allowances work by reducing your taxable income to reduce the amount of income tax you pay. This means that you can have a certain amount of taxable income each year, tax free.

You only pay income tax on taxable income that is above your tax allowances.

You are only eligible for UK tax allowances if you are resident in the United Kingdom or if you are a citizen of an EEA country.

If you are resident in the UK but not domiciled in the UK and you claim to use the ‘remittance basis’ of taxation, you may not be eligible for UK tax allowances

What is the personal allowance?

The personal allowance is a tax allowance that is available to most people who are resident in the UK. It reduces the amount of taxable income on which you pay tax.

The basic personal allowance is £11,000 for 2016/17.

The personal allowance can be reduced if your taxable income is over £100,000, but we aim this guidance at low-income taxpayers so do not cover those issues here.

If you were born before 6 April 1938, you may be able to claim a higher personal allowance for an earlier year,but note that it has ceased in 2016/17. This was known as the 'age-related allowance'.

What is the age-related personal allowance?

The age-related personal allowance has ceased in 2016/17,  However, if you were born ore 6 April 1938 you may be able to claim for earlier years. It used to increase your personal allowance and reduce the amount of tax you pay.

What is the starting rate for savings and the personal savings allowance?

Starting Rate for Savings (SR) - On 6 April 2015 the 10% starting rate was abolished and replaced by the 0% starting rate. The rules for signing an R85, the form used to inform a savings provider to pay interest gross also changed.

The 0% band for 2015/16 & 2016/17 is £5,000. It is restricted by non- savings taxable income (ignoring dividends) so that none of the band will be available if that income is above their personal allowance (& blind person’s allowance if claimed) plus the £5,000 starting rate.

Personal Savings Allowance (PSA) - On 6 April 2016 the Personal Savings Allowance will be introduced, £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate tax payers aren’t eligible.

The two allowances work together and are dependent on your total taxable income.

Interest Paid Gross – From 6 April 2016 savings income will be paid gross (without tax being taken). The R85 will be discontinued.

The easiest way to establish if you qualify is to add up your non- savings income (ignoring dividends), if it is below or within your personal allowance plus £5,000 then the Starting Rate for Savings will apply.

If this doesn’t cover all of your savings income then apply the Personal Savings Allowance. To determine which rate to use add up all of your taxable income including savings income, but ignoring dividends. If it's £43,000 or less then use £1,000, if between £43,001 and £150,000, use £500.

Any savings income over these amounts will be taxable at the appropriate rate and it is your responsibility to inform HMRC. Where possible the amount owed will be collected via your tax code but if this isn’t possible a self-assessment tax return will be required.

Gift Aid alert – People who at present, use the tax they pay on savings as part of their calculation to decide how much they can gift aid need to recalculate. Failure to do so may mean they gift aid too much and may end up with a debt to HMRC.

The following examples for 2106/17 explain the interactions between the SR and the PSA.

Example 1 - Alex is 71 and has non savings income of £11,000. In addition he receives £600 in savings income. His non savings income is below £16,000 and the savings income is within the 0% savings rate of £5000. He doesn’t need to pay tax on his savings and doesn’t have to do anything.

Example 2 - If Alex’s non savings income is £15,600, it is still below the £16,000 threshold and £400 of  his savings income is covered by the 0% savings rate. The remaining £200 is covered by the Personal Savings Allowance. He doesn’t need to pay tax on his savings and doesn’t have to do anything.

Example 3 - If Alex’s non savings income is between £16,000 and £43,000, he will not be eligible for the 0% Starting Rate but his savings income will be covered by the Personal Savings Allowance of £1,000. He doesn’t need to pay tax on his savings and doesn’t have to do anything.

Example 4 - If Alex’s non savings income is between £43,001 and £150,000 he will not be eligible for the 0% starting rate and only £500 of his savings income will be covered by the Personal Savings Allowance. The remaining £100 is taxable at 40% and he will need to contact HMRC to arrange payment.

What is the dividend allowance?

The rules are changing in April 2016 when a dividend allowance of £5,000 is being introduced, the tax credit is being abolished. Any dividend payments  above £5,000 will be taxable at either 0%, 7.5%, 32.5% or 38.1% depending on your total taxable income. For example, a person receiving £6,000 in dividends won't pay tax if their total taxable income is under their personal allowance. However, they will pay tax on £1,000 at 7.5% if their total taxable income is between £11,001 and £43,000, at 32.5% on an income between £43,001 and £150,000 and 38.1% on income of £150,001 and over.

Gift Aid alert – People who at present, use the dividend tax credit as part of their calculation to decide how much they can gift aid need to recalculate. Failure to do so may mean they gift aid too much and may end up with a debt to HMRC.

What is the marriage allowance?

Not to be confused with the Married Couples Allowance (MCA) below! If you are entitled to the MCA, you cannot claim this one as well. The Marriage Allowance can be claimed by a married couple or civil partnership where both partners are no more than a basic rate taxpayers. The lower earner can transfer a fixed amount of £1,100, 2016/17 of allowance to the other. Doing so can only reduce the recipient’s liability to nil, it cannot create a refund.

If you contact HMRC to stop transferring the allowance to your partner, it will end at start of the next tax year.

If your partner contacts HMRC to stop receiving your allowance, HMRC will backdate the change to the start of the current tax year.

If your partner dies after you’ve transferred some of your Personal Allowance to them:

  • their estate will be treated as having the increased Personal Allowance
  • your Personal Allowance will go back to the normal amount

If your partner transferred some of their Personal Allowance to you before they died:

  • your Personal Allowance will remain at the higher level until the end of the tax year (5 April)
  • their estate will be treated as having the smaller amount

If you get divorced or dissolve your civil partnership
Contact HMRC to cancel the allowance. You can have the change applied at the start of the tax year (6 April) you got divorced in - or the start of the next one.

If you don’t tell HMRC, the allowance will end automatically at the end of the tax year (5 April).

What is blind person’s allowance?

Blind person's allowance (‘BPA’) reduces the amount of taxable income that you have to pay tax on. If you are eligible for BPA, you are entitled to it in addition to the personal allowance or age-related personal allowance. If your income is not high enough for you to benefit from the allowance you can transfer the unused part it to your spouse or civil partner.

The BPA for 2016/17 is £2,290.

If you are entitled to BPA, you must tell HMRC to claim it.

You do not have to be entirely without sight to claim the BPA, but you do have to meet one of the following criteria:

  • You can claim if you are registered as blind with a local authority in England and Wales; or
  • If you live in Scotland or Northern Ireland, your sight must be so bad as to stop you performing any work for which eyesight is essential.

Entitlement to BPA does not depend on your age.

The amount of BPA to which you are entitled does not depend on your level of income. The BPA is not reduced where your income is more than a certain amount.

If both you and your spouse or civil partner are entitled to claim BPA you can each claim it independently,

The English and Welsh system in more detail

An eye specialist can check your sight and, if appropriate, certify that you are blind. You can ask your GP to refer you to an eye specialist.

Social Services should then contact you to see if you want to be added to the register, and if you do, then the date that the consultant signed your certification form is the date of registration.

Once you are registered, contact HMRC as soon as possible and tell them that you want to claim BPA.

If in the previous tax year you obtained evidence of blindness on which the registration will be eventually made, but you only registered the following tax year, you can claim the relief for both years.

What is married couple’s allowance?

The married couple's allowance (MCA) does not reduce the amount of taxable income on which you pay tax. Once your tax liability has been calculated the MCA is then removed. It can reduce your tax bill to zero but will not produce a refund.

You are only entitled to MCA if you are married or in a civil partnership and at least one of you was born before 6 April 1935.

MCA works by deducting 10% of the allowance from the tax due on your taxable income. If you are a tax payer your coding notice from HMRC should show half of the MCA amount.

For 2016/17 the full allowance is £8,355. This means you get a maximum deduction of £835.50 from your income tax.

In the year of marriage the allowance is calculated monthly, a marriage in June would mean that 7/12ths of the allowance would be available.

You can get married couple’s allowance in full in the year that you separate.

If you and your spouse or civil partner are later reconciled the allowance is available for the tax year of reconciliation. If this is also the year in which you separated, the allowance is given without any break.

What is the relief for maintenance payments?

Maintenance payments relief does not reduce the amount of taxable income on which you pay tax. It is used to calculate an amount to reduce your tax bill instead.

Maintenance payments relief is being phased out. You are only entitled to the relief if you meet all of the following conditions:

  • You are separated or divorced or your civil partnership has been dissolved.
  •  You, or your ex-spouse or former civil partner, were born before 6 April 1935.
  • You are making maintenance payments by Court Order.
  • The maintenance payments are for the benefit of your ex-spouse or former civil partner or for your children under the age of 21.
  • Your ex-spouse or former civil partner is not remarried or in a new civil partnership.

Maintenance payments relief works by deducting 10% of the relief from the tax due on your taxable income.

For 2016/17 the maximum relief is £3,220. This means you get a deduction of £322 from your tax liability.

If your maintenance payments are lower than £3,220, your deduction is 10% of the amount of maintenance you pay.

Full maintenance payments relief is available in the year of separation, but relief is not available after the spouse or civil partner remarries or registers a new civil partnership.

Can I transfer my allowances to my spouse or civil partner?

We are often asked if married couples or civil partners can transfer their tax allowances to their spouse or partner if they do not use them. Some allowances are transferable, but others are not.

Marriage allowance - You can transfer  some of your basic personal allowance to your spouse or civil partner, providing neither of you are higher rate tax payers and the one transferring has unused allowance.

Blind person's allowance - You can transfer the blind person's allowance (‘BPA’) to your spouse or civil partner, if your income is too low to make use of it. Your surplus BPA can then reduce their taxable income for tax purposes. If you are a non-taxpayer and your spouse or civil partner pays tax you can still transfer your BPA to them. You can transfer the BPA by contacting HMRC.

Married Couple's allowance - You can transfer the married couple’s allowance to your spouse or civil partner, if your income is too low to make use of it..
If you are claiming both blind person’s allowance and married couple’s allowance you cannot transfer one allowance and not the other. You must transfer both allowances together.
How does marriage separation affect my tax allowances?
Separation affects your married couple's allowance and may bring you entitlement to maintenance payments relief. As noted above, both of these allowances apply only if either you or your spouse or civil partner was born before 6 April 1935.

HM Revenue & Customs (‘HMRC’) will treat you as living together if you are separated due to circumstances beyond your control, for example, if one of you is taken into a nursing home or hospitalised long term.

For income tax purposes you are treated as living with your spouse or civil partner unless you are separated:

  • under an order of a Court, or
  • by a formal deed of separation executed under seal, except in Scotland, where the deed should be witnessed, or
  • in such circumstances that the separation is likely to be permanent.

 

 

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What is rent-a-room relief?

Income from renting out a room to a lodger may qualify for ‘rent-a-room relief’, if:

  • your gross rent-a-room income does not exceed £7,500, 2016/17 (£4,250 previously) for the tax year (before the deduction of any expenses),
  •  the source of the income relates only to one residence, and
  •  the following conditions are met:
  1. the income arises from the letting of furnished accommodation in a ‘residence’ in the UK, or from associated goods and services (for example providing meals, cleaning or laundry services to a lodger),
  2. the house in which the room is let is your only or main residence, and
  3. if it were not for the rent-a-room relief, the income would be taxable (either as trading income, property income or miscellaneous income).

If all of the above conditions are met, the income is exempt from tax and you may not claim any deductions for related expenses. You do not need to do anything for the exemption to apply; it will apply automatically unless you ‘opt out’.

What if my rent-a-room income exceeds £7,500  for any one year?

If you meet all of the conditions for rent-a-room relief above, but your gross rental income exceeds £7,500, 2016/17, you do not qualify for the automatic exemption.

However, you can make an election to opt in to an ‘alternative basis’. The taxable amount will then be the gross rent received, plus any payments received for meals and services, less £7,500, 2016/17.

This election must be made to HMRC in writing by 31 January, in the second year after the end of the relevant tax year. For example, if you wish to opt in to the ‘alternative basis’ for the tax year ended 5 April 2016, you must make the election by 31 January 2018. You usually do this by ticking the relevant box on your self assessment tax return that you want the relief to apply.

What if the rent-a-room income is split between me and my spouse/partner/flatmate?

If you and another person are both due to receive rental income from the same property, then the allowance is shared equally between you. The above tests and conditions still apply, but the threshold in each case is £3,750, 2016/17 instead of £7,500, 2016/17. This means that if your income exceeds £3,750 then you can elect to opt in to the ‘alternative basis’, and if it does not then it is automatically exempt.

A quirk in the rules is that even if more than two of you are due to share the rental income, you still each get relief for up to £3,750. So if three of you own a property together and sub-let a room to a lodger, overall you get 3 x £3,750 relief – that is, £11,250!

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What tax rates apply to me?

Under the UK tax system, generally your earnings or non-savings income is treated as being taxed first, then your savings income and then your dividends.

You can find the current and recent years’ tax rates and bands’ in the next section 'Rates and bands in table format'

What tax rates apply to my earnings or non-savings income?

Earnings or non-savings income includes wages, pensions, taxable state benefits, profits from self-employment and rental income. This is not a complete list. Separately, we provide more information on what income is taxable.

You have to pay income tax on your taxable earned income that exceeds your tax allowances. You are also allowed to deduct any allowable expenses that you have incurred.

You pay income tax at the basic rate of 20% on your taxable earned income that falls within the basic rate band. The basic rate band for 2016/17 is £32,000.

If you have taxable earned income that exceeds the basic rate limit, you will have to pay more tax. This is firstly charged at the higher rate of 40% on the income above the basic rate limit. This means that in 2016/17 you will pay tax at the rate of 40% on taxable earned income above the limit of £32,000.

If your taxable earned income exceeds the higher rate band limit, you will have to pay tax at the additional rate of 45% on the income above the limit. The higher rate band limit is £150,000 for 2016/17.

What tax rates apply to my savings income?

As your taxable savings income is taxed after your earned income, the tax rates that apply to your savings income depend on how much earned or other non-savings income, such as rents, you have.

If your taxable savings income falls within the basic rate band, you will normally pay income tax at the rate of 20%. The basic rate band for 2016/17 is £32,000. There is also a '0% starting rate' of £5,000  for savings income only, which may apply to your savings income in certain situations. There is also a 'personal savings allowance' of £1,000, 2016/17 for saving income only.

If you have any taxable savings income above the basic rate limit, you will have to pay more tax on it. This is firstly charged at the higher rate of 40% on the income above that limit. This means that in 2016/17 you will pay tax at the rate of 40% on taxable savings income above the limit of £32,000 and a 'personal savings allowance' of £1,000, 2016/17 for savings income only.

If your taxable savings income exceeds the higher rate limit, you will have to pay tax at the additional rate of 45% on the income above that limit. The higher rate band limit is £150,000 for 2016/17.There is a 'personal savings allowanc'e  of £500, 2016/17 for savings income only.

How does the starting rate for savings work?

The starting rate for savings is a special 0% rate of income tax for savings income that falls within certain limits. It will only apply to you if your earned income is  low. The starting rate for savings band is £5,000 for 2016/17.

If your taxable earned or non-savings income (ignoring dividends) is above your personal allowance plus £5,000, the starting rate for savings will not apply to your taxable savings income.

If any of your taxable savings income falls within £5,000 after your personal allowance, you will not be liable to pay tax on that taxable savings income.

How does the personal savings allowance work?

On 6 April 2016 the personal savings allowance will be introduced, £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate tax payers aren’t eligible.

The allowance works together  with the starting rate for savings and both are dependent on your total taxable income.

The easiest way to establish if you qualify is to add up your non- savings income (ignoring dividends), if it is below or within your personal allowance plus £5,000 then the starting rate for savings will apply.

If this doesn’t cover all of your savings income then apply the personal savings allowance. To determine which rate to use add up all of your taxable income including savings income, but ignoring dividends. If it's £43,000 or less then use £1,000, if between £43,001 and £150,000, use £500.

Any savings income over these amounts will be taxable at the appropriate rate and it is your responsibility to inform HMRC. Where possible the amount owed will be collected via your tax code but if this isn’t possible a self-assessment tax return will be required.

Gift Aid alert – People who at present, use the tax they pay on savings as part of their calculation to decide how much they can gift aid need to recalculate. Failure to do so may mean they gift aid too much and may end up with a debt to HMRC.

What are the upper and lower limits of income to get the starting rate for savings?

The guide below just provides the general rule. This may not provide you with the correct information if you have additional tax allowances or expenses that you can claim.

If you have taxable earned or non-savings income of between £11,000 and £16,000 the savings rate will apply to at least part of your savings income.

What are the upper and lower limits of income to get the starting rate for savings if you also get blind person's allowance?

The guide below provides the general rule. This may not provide you with the correct information if you have additional tax allowances or expenses that you can claim.

If you are also receiving blind person's allowance the upper limits will be increased by this amount and you will get the savings rate if your taxable non-savings income is between £11,000 and £18,290.

What tax rates apply to my dividends?

The rules are changing in April 2016 when a 'dividend allowance' of £5,000 is being introduced, the tax credit is being abolished. Any dividend payments  above £5,000 will be taxable at either 0%, 7.5%, 32.5% or 38.1% depending on your total taxable income. For example, a person receiving £6,000 in dividends won't pay tax if their total taxable income is under their personal allowance. However, they will pay tax on £1,000 at 7.5% if their total taxable income is between £11,001 and £43,000, at 32.5% on an income between £43,001 and £150,000 and 38.1% on income of £150,001 and over.

Gift Aid alert – People who at present, use the dividend tax credit as part of their calculation to decide how much they can gift aid need to recalculate. Failure to do so may mean they gift aid too much and may end up with a debt to HMRC.

More information

What if my only taxable income is savings income?

If you have no taxable earned income and all your income is taxable savings income, you will get your personal allowance against part of your income. The next part of your income that falls within the starting rate for savings band, £5,000, will not be taxed. Then you get the personal saving allowance 0f £1,000  where the income won't be taxed. The balance of your income that exceeds the starting rate band and personal savings allowance will be taxed at the basic rate of 20%.

What if my non-savings or earned income is above the upper limit for the starting rate for savings?

If your taxable non–savings or earned income is more than the upper limits for the starting rate for savings the 0% savings rate will not be available. However you will be eligible for the personal savings allowance of £1,000 (£500 for incomes over £43,000 but below £150,000) savings income over this will be taxed in full at 20% (40% over £43,000, 45% over 150,000).

What if my earned income is less than my tax allowances?

If your taxable non-savings or earned income is below your tax allowances, you will be able to set some of your tax allowances against your savings income.

Any savings income that exceeds your tax allowances but is within the 0%  starting rate for savings or personal savings allowance will not be taxable. The balance of your savings income that exceeds the starting rate band  and the personal savings allowance will be taxed at the basic rate of 20%.

From April 2016 banks and building societies will not deduct tax at source. You will need to inform HMRC of any savings income you receive over the 0% savings rate and personal savings allowance.

What if my non-savings or earned income falls between the lower and upper limits for the starting rate for savings?

If you have used up your tax allowances against your non-savings or earned income, but your remaining non-savings income is less than the upper limit of the starting rate band, you can use the balance of the starting rate band against your taxable savings income, if necessary you can then use your personal savings allowance. This means some or all of your taxable savings income won't be taxed any amount not covered by the 0% starting rate or the personal savings allowance is then taxed the basic rate of 20%.

The following examples for 2106/17 explain the interactions between the SR and the PSA.

Example 1 - Alex is 71 and has non savings income of £11,000. In addition he receives £600 in savings income. His non savings income is below £16,000 and the savings income is within the 0% savings rate of £5000. He doesn’t need to pay tax on his savings and doesn’t have to do anything.

Example 2 - If Alex’s non savings income is £15,600, it is still below the £16,000 threshold and £400 of  his savings income is covered by the 0% savings rate. The remaining £200 is covered by the Personal Savings Allowance. He doesn’t need to pay tax on his savings and doesn’t have to do anything.

Example 3 - If Alex’s non savings income is between £16,000 and £43,000, he will not be eligible for the 0% Starting Rate but his savings income will be covered by the Personal Savings Allowance of £1,000. He doesn’t need to pay tax on his savings and doesn’t have to do anything.

Example 4 - If Alex’s non savings income is between £43,001 and £150,000 he will not be eligible for the 0% starting rate and only £500 of his savings income will be covered by the Personal Savings Allowance. The remaining £100 is taxable at 40% and he will need to contact HMRC to arrange payment.

 

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Tax rates and bands in table format

Tax rates and Allowances

 

Income tax allowances

Allowances 2013/14 2014/15 2015/16 2016/17
Personal Allowances from 6 April 2013: * See note below
those born after 5 April 1948 9,440 10,000 10,600 11,000
those born on or between 6 April 1938 and 5 April 1948 10,500 10,500 10,600 11,000
those born before 6 April 1938 10,660 10,660 10,660 11,000
Married couple's allowance:
maximum amount 7,915 8,165 8,355 8,355
minimum amount 3,040 3,140 3,220 3,220
Blind person's allowance 2,160 2,230 2,290 2,290
Income limit for personal allowance 100,000 100,000 100,000 100,000
 Income limit for personal allowance for those born before 6 April 1938 **  26,100  27,000  27,700 N/A

* From 2013/14 an individual's personal allowance depends on their date of birth and their income in the tax year. The age related allowance is frozen until the basic personal allowance catches up. Only those people born before 6 April 1948 are entitled to the age related allowance.

In years 2014/15 and 2015/16 only people born before 6 April 1938 are entitled to the age-related personal allowance. Individuals born on or after 6 April 1938 are entitled to the basic personal allowance.

2016/17 - The age allowance ceases to exist.
** The age-related personal allowance reduces where the individual's income in the tax year is above the income limit by £1 for every £2 above the limit until the level of the basic personal allowance is reached.

Income tax - taxable bands

Band 2013/14 Band 2014/15 Band 2015/16 Band 2016/17
Starting rate for savings 10% Up to £2,790 Starting rate for savings 10% Up to £2,880 Starting rate for savings 0% up to £5,000 Starting rate for savings 0% Up to £5,000
Basic rate 20% Up to £32,010 Basic rate 20% Up to £31,865 Basic rate 20% up to £31,785 Basic rate 20% Up to £32,000
Higher rate 40% £32,011 to£150,000 Higher rate 40% £31,866 to £150,000 Higher rate 40% £31,786 to £150,000 Higher rate 40% £32,001 to £150,000
Additional rate 50% Over £150,000 Additional rate 50% Over £150,000 Additional rate 45% Over £150,000 Additional Rate 45% Over £150.000

 

Age allowance restriction - personal allowance

2013/14 2014/15 2015/16 2016/17
Income limit for receiving basic personal allowance only - aged 65-74 N/A N/A N/A N/A
Income limit for receiving basic personal allowance only - aged 75 or over N/A N/A N/A N/A
Income limit for receiving basic personal allowance only - born between 6 April 1938and 5 April 1948 £28,220 £28,000 N/A N/A
Income limit for receiving basic personal allowance only - born before 6 April 1938 £28,540 £28,320 £27,820 N/A

Dividends

2013/14 Tax rate 2014/15 Tax rate 2015/16 Tax rate 2016/17 Tax rate
Up to £32,010 10% Up to £31,865 10% Up to £31,785 10% Personal allowance up to £32,000 7.5%
£32,011 -£150,000 32.50% £31,866 to £150,000 32.50% £31,786 to £150,000 32.50% £32,001 to £150,000 32.50%
Over £150,000 42.50% Over £150,000 37.50% over £150,00 37.50% over £150,00 38.10%

Capital gains tax

2013/14 2014/15 2015/16 2016/17
Standard rate 18% 18% 18% 18%
Rate for higher and additional rate taxpayers 28% 28% 28% 28%
Annual exemption 10,900 11,000 11,100 11,100
Entrepreneurs' Relief rate 10% 10% 10% 10%
Entrepreneur's Relief lifetime limit 10M 10M 10M 10M

TBA - to be advised

Inheritance tax

2014/15 2014/15 2015/16 2016/17
Chargeable lifetime transfers (after exemptions)
Up to £325,000 0% 0% 0% 0%
Over £325,000 20% 20% 20% 20%
On death (net estate)
Up to £325,000 0% 0% 0% 0%
Over £325,000 40% 40% 40% 40%

 

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