When trying to work out how much tax you need to pay, once you have taken into account the personal allowance that you are given which is the tax free amount that you can earn, you may have different sources of income and it is possible that not all of these sources are taxable.
If you are receiving Working Tax Credit and indeed Child Tax Credit, you may wonder if you have to pay tax on it.
The answer for this type of benefit is no, both Working Tax Credit and Child Tax Credit are not taxable benefits.
Therefore when calculating how much tax you need to pay, you can exclude any money that you get from these benefits in your calculations.
This may mean that you don’t have to pay much tax at all as you can earn up to £11,000 in the tax year 2016/17 before you have to pay tax on earnings on top of that.
The rules regarding different State benefits can be quite complicated as some benefits are actually taxable (including the State Pension) but it may be the case that tax is not deducted at source from these earnings.
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.
If you are wondering do children get a personal allowance then the short answer is yes, they do. Everyone in the UK is entitled to a personal allowance, letting them earn a certain amount of their income tax free.
The amount of the personal allowance for 2015/16 is £10,600 per annum for each person and the personal allowance for 2016/17 will increase to £11,000 for the tax year.
Although it is unlikely that many children will earn as much as the personal allowance, there are obviously exceptions to the rule so the personal allowance can be useful to everyone. Only certain types of income are subject to tax so watch out for those that are not taxed anyway such as income from certain National Savings accounts and Premium Bonds and income from Junior ISAs.
Unlike with married couples it is not possible to transfer any of the child’s personal allowance to the parent though.
Another question related to this subject is – do children have to pay tax? – and the answer to this one as well is yes. If they have earnings that exceed the personal allowance then yes they have to pay tax on those earnings just like anyone else might do. They would even be subject to higher rate tax if that was appropriate to their circumstances.
The long question is: Can I transfer my personal allowance to my husband/wife/civil partner if I am not using it?
Well from April 2015 the answer is yes, you can transfer part of it. So, if you are earning less than the personal allowance in 2015/16 and your partner (i.e. wife/husband/civil partner) has earnings that are not taxed at any higher than the 20% rate, then you can transfer part of your personal allowance to them – currently the amount that you can transfer is £1,060.
This would mean that they would have a personal allowance of £11,660 instead of £10,600, reducing their tax bill by £212 for the year and your personal allowance would be £9,540. Therefore if you earn less than £9,540 a year then it is a no-brainer to transfer this allowance over to your partner.
However, your partner must not be in the higher rate tax bracket for the transfer to be allowed.
Also, HMRC have not yet declared how this transfer will take place although they have indicated that it will be via an online submission.
This may help families in particular where there is the traditional model of one parent staying at home to look after the children and the other working.
The standard level of income that you would need to earn to fall into the 40% tax bracket is £42,385. Of course this may be different in certain circumstances so you should take advice for your personal situation. So it is possible if you earn below this and your partner earns less than £9,540 then it is worthwhile for you to transfer over the portion of the personal allowance. OK so a gain of £212 a year is not massive but it’s certainly worth having.
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