Is the Personal Allowance Prorated?

Are you wondering if the personal allowance is prorated – i.e you are only given a portion of it if you only work for part of the tax year?

Perhaps you are about to leave the country or maybe you have just left college and only just started work. Perhaps you are checking what happens when someone has died.

In any case the answer is no, the personal allowance is not prorated – everyone is given the full personal allowance to use in one tax year.

For example, if you are in full time education, and you start work in the January of a particular year, then you are still given the whole personal allowance that you can apply to your earnings from January to 5th April. So for 2016/17 you could earn £11,000 and not have to pay any tax on that money.

Or maybe you leave the country half way through the tax year and become non-resident then you are still entitled to use the whole of the personal allowance for the period of the year that you were resident in the UK (there are other complex rules on earnings overseas that may have to be taken into account though).

Or, if someone dies perhaps in May, then their executors can still set their earnings for that tax year against the whole personal allowance for that tax year. They would then need to claim the overpaid tax from HMRC.

One upshot of this, if it is the case that you start or finish earning in the middle of the tax year, is that it is possible that you will pay too much tax as your tax code may assume that your personal allowance should be spread over the whole tax year.

In terms of starting a new job, you may be taxed at the basic rate to start with until your tax code is sorted out.

If you have stopped earning part way through a tax year, you should check how much tax you have paid. If you think you have paid too much tax then you can reclaim this overpayment at the end of the tax year.  In some circumstances you may be able to get a refund of over paid tax before the end of the tax year. Check with the tax office if you need clarification.

What is the 40% Tax Limit in 2016?

What salary do I have to earn to get caught by 40% tax?

Generally each year the amount that you can earn before having to pay higher rate tax (which is currently charged at the rate of 40%) is increased by the government and 2016/17 is no different.

In 2015/16 there was a personal allowance of £10,600 and an allowance of £31,785 which was charged at the basic rate of 20% so in effect you could earn £42,385 before you fell into the 40% tax bracket.

In 2016/17 both the personal allowance and the 20% tax band have been increased to £11,000 and £32,000 respectively so that (assuming you are entitled to the full personal allowance), you could earn up to £43,000 before having to pay any tax at 40%.

Of course it is possible that you may have a different personal allowance or you may have to take into account other earnings or benefits in kind that may take you over the threshold.

However, one benefit in 2016/17 is that you now have a personal savings allowance of £1,000 if you are in the lower rate tax bracket or £500 if you are in the higher rate tax bracket so you will not need to pay tax on savings interest under this amount.

The increase from £42,385 to £43,000 is effectively a 1.45% increase so it is quite possible that if you were close to the threshold in 2015/16 and you have had an increase in your income, that you may now get caught in the 40% tax bracket.

Personal Savings Allowance 2016/17

With effect from April 2016 the government have introduced a personal savings allowance that means that the majority of people will not have to pay tax on their interest from savings.

This is a new allowance which is in addition to the £5,000 allowance for low earners that was introduced in 2015.

For those whose earnings are in the 20% tax bracket, there is a £1,000 savings interest allowance – so you can earn £1,000 in interest on your savings without paying any tax on that interest.

In order to have savings where some part of the interest is taxable it is likely that you would need to have over £50,000 in savings – and this is worked out on a 2% interest rate which may not always be achieved.

For those whose earnings put them in the higher rate tax bracket (i.e. those who earn over £43,000 but below £150,000) there is a reduced personal savings allowance of £500.

Anyone in the additional rate tax bracket will not be entitled to any personal savings allowance.

Because these new rules mean that 95% of people will no longer pay tax on their savings, the tax will no longer be deducted at source from savings interest as it has been in previous years. Therefore there is no need to notify your bank or building society to ask them not to take tax off your interest.