Tax Code 2016/17

So it is coming up to the time when the Inland Revenue will start to issue your tax code for 2016/17. Tax codes are issued to individuals and their employers so that the employer knows how much tax to deduct and at what rate.

Standard tax code

The standard 2016/17 tax code for those with uncomplicated financial situations (only one paid employment, no tax owing, no other allowances due etc) will be 1100L. This tax code means that you are entitled to the standard UK personal allowance of £11,000 of tax free earnings in the tax year 2016/17. (Originally the personal allowance was going to be £10,800 in 2016/17 but the increase to £11,000 was brought forward by a year).

But lots of people have different tax codes that are not at the standard rate with perhaps different letters at the end of the code. It can be very confusing to try and figure out why you may have a different tax code to the standard one and getting through to the Inland Revenue on the phone might be a struggle (0300 200 3300 is the number to all for tax code queries). you may owe tax from previous years, you may have more than one job or your partner may have passed you part of their allowance are just a few examples of why you may not have a standard tax code.

Can’t figure out your tax code?

If you can’t figure it out though, you will probably need to speak to the Inland Revenue to check that you have the right tax code and will not be paying too little (or indeed too much) tax in 2016/17. Although paying too little tax may sound good, it will have to be repaid at some point!

Tax code letters

So the letters at the end of the tax code may also give you an indication of what your code is all about.

There are a couple of new tax codes that have been introduced this year which take account of the new transferable marriage allowance – those are the letter M if you have received a transfer of the marriage allowance and the letter N if you have given a up part of your allowance.

You can get a full list of the tax code letters and what they mean on the Inland Revenue website.

Do Pensioners Get a Higher Personal Allowance?

If you are over 65 do you get a higher personal allowance? This is a question which many pensioners may wonder about as they have heard that this might be the case.

Unfortunately the current answer to this is only a small amount, only if you are over 75 and only if you earn under a certain amount.

In the past both those over 65 and those over 75 were entitled to a higher tax free allowance than those who were under 65. However, those extra allowances have been phased out coinciding with the increase in the personal allowance for everybody. The last part of that phase is happening this year (2015/16) whereby those over 75 at 6 April are entitled to a personal allowance of £10,660 rather than the standard personal allowance of £10,600.

However, if you are in that category and have earnings in excess of £27,700 (and earnings means things like pension income), then your extra amount of personal allowance is reduced by £1 for every £2 of income you receive over this amount, to the minimal level of £10,600.

From 2016/17 onwards there will only be a single personal allowance rate for all ages and that will be £10,800 for 2016/17.

Do Children Get a Personal Allowance?

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.

Maybe babies don't earn much but they are still entitled to the personal allowance...
Maybe babies don’t earn much but they are still entitled to the personal allowance…

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.


Personal Allowances for 2017

The personal allowances for 2017 have been announced and have been increased for all tranches of earnings from the allowance for zero tax to the 40% earnings threshold. This should mean a lower tax bill for most people although obviously it depends on whether earnings have increased in a similar manner.

The personal allowances for 2017 are as follows:

Personal allowance at zero rate tax – £11,200

Basic rate tax allowance – £32,400

Therefore the Higher rate tax threshold increases to – £43,600

The aim is to raise the higher rate tax threshold to £50,000 by the end of parliament and the personal allowance to £12,500 at the same point.

By 2017 we are referring to the tax year that runs from 6 April 2017 to 5 April 2018.

The basic rate of tax for 2017/18 is currently set at 20% (at time of publishing August 2015) and the higher rate tax is 40%. In addition there is an additional tax rate of 45% for earnings over £150,000.


New Dividend Tax Introduced in 2015 Budget

In recent years there have been a lot of changes to personal allowances and indeed other allowances that affect personal income.  Not only has the personal allowance increased significantly and more recently a tax free savings allowance was introduced, now there is another change to the tax charged on dividend payments to individuals.

The changes are a little bit complex and will affect quite a lot of people receiving dividend income, and not always for the better.

There is a new allowance of £5,000 per person per year on dividends which is tax free, but any dividend income over this amount will be taxed at a higher rate than previously, depending on the tax bracket of the individual.

A basic rate tax payer will need to pay 7.5% tax on amounts over £5,000, a higher rate tax payer will need to pay 32.5% and an additional rate tax payer will need to pay 38.1%.

These rates are effective from April 1016.

It may be useful to note that the new £5,000 savings tax free rate is in addition to this (for those who have low enough incomes) and so it may be worth getting some advice as to whether some shares should be switched to a different investment vehicle to minimise tax.

Full Details of Summer 2015 Budget Inheritance Tax Changes

In the summer 2015 budget this week, George Osborne introduced some major changes to the rules on inheritance tax, so that properties were given an additional allowance that would take a lot of them out of the inheritance tax limits.

The current Inheritance Tax threshold is £325,000. This will remain but in addition there will be an allowance for family homes that are passed on to direct descendants (children and grandchildren). This new allowance will reach it’s maximum level of £175,000 in 2020/21 but will be tapered from 2017 onwards until it reaches that rate.

So a summary of the new allowance in tax years is as follows:

2017/18 – £100,000

2018/19 – £125,000

2019/20 – £150,000

2020/21 – £175,000

The nil rate band will then increase in line with the Consumer Price Index from 2021 onwards.

The allowance can be passed between couples so that when the first partner dies that allowance is passed on to the surviving spouse so that when they die the allowance is effectively doubled. Thus when the second partner dies the allowance could be worth up to £350,000. Add this to the standard Inheritance tax allowance (that can also be passed between spouses) and this would give a total value of £1m (remembering that £350,000 of this amount can only be held against property).

The existing £325,000 allowance can be used against any assets that the deceased holds, including property.

There has also been a clause introduced that means that if someone downsizes from their main residence, the value of their previous home can be taken into account. For example, an individual might choose to downsize from a home worth £250,000 to a home worth £150,000. They could still benefit from the maximum allowance of £175,000 in 2020-21 if they leave the home and £25,000 of other assets to direct descendants.

There will also be a tapered withdrawal of this new Inheritance Property Allowance for properties worth over £2m. The tapering will be at the rate of £1 for every £2 in value over £2m, for example:

Property worth £2,100,000 – IHT Property allowance is reduced by £50,000.

Therefore, property worth £2,350,000 (after 2020/21) will not have any property allowance attached to it.


40% Tax Band Increased for 2016/17

The chancellor George Osborne this week announced in his extra budget that the figure at which the 40% tax band kicks in will be increased from 2016 to £43,000 from the current level for 2015/16 of £42,385.

The 2015/16 figure of £42,385 is made up of the £10,600 personal allowance and the 20% tax band amount of £31,785.

Next year’s figure is made up of the new £11,000 personal allowance and a 20% tax band amount of £32,000.

Whilst the personal allowance had been increasing, the 20% tax band allowance had been decreasing in recent years so this is the first increase for a while which brings it back up to the level it was in 2013/14.

Personal Allowance 2016/17

In the first sole Conservative budget in 19 years, George Osborne has pledged to accelerate the increase in the personal allowance for 2016/17 from the previously announced figure of £10,800 to the new figure of £11,000.

The personal allowance 2016/17 is £11,000

The current personal allowance of £10,600 was due to increase to £10,800 in April 2016 but will now increase to £11,000 which was the proposed figure for 2017/18.

This all leads up to the plan for a personal allowance figure of £12,500 that the Conservatives plan to be in place by 2020. The government has continued to publicise it’s plan to increase the personal allowance so that those on lower wages do not have to pay any tax. However, of course, any increase in the personal allowance will also benefit those higher earners as they will have enough earnings to cover it. The only people who will not benefit in the increase in the personal allowance are those whose earnings are too high to be entitled to a personal allowance.

Each increase of £200 in the personal allowance should save people earning less than £100k pa, £40 a year in tax, or £3.33 a month, not a massive amount but every little helps if you are earning on the lower end of the scale.

£100k Tax Trap

There is a point when you get to earning £100,000 a year where the personal allowance becomes a bit more complicated as the allowance is withdrawn gradually on earnings over this level. Some people refer to this as the £100k tax trap.

Basically the personal allowance is reduced by £1 for every £2 of earnings over £100,000. Therefore your personal allowance and tax bands would be as follows, depending on your earnings:

For 2015/16

Earnings Personal Allowance 20% Band 40% Band Total Tax
£100,000 £10,600 £10,600-£42,385 £42,386-£100,000 £29,403
£102,000 £9,600 £9,600-£41,385 £41,386-£102,000 £30,603
£104,000 £8,600 £8,600-£40,385 £40,386-£104,000 £31,803
£106,000 £7,600 £7,600-£39,385 £39,386-£106,000 £33,003
£108,000 £6,600 £6,600-£38,385 £38,386-£108,000 £34,203
£110,000 £5,600 £5,600-£37,385 £37,386-£110,000 £35,403
£112,000 £4,600 £4,600-£36,385 £36,386-£112,000 £36,603
£114,000 £3,600 £3,600-£35,385 £35,386-£114,000 £37,803
£116,000 £2,600 £2,600-£34,385 £34,386-£116,000 £39,003
£118,000 £1,600 £1,600-£33,385 £33,386-£118,000 £40,203
£120,000 £600 £600-£32,385 £32,386-£120,000 £41,403
£121,200 £0 £0-£31,785 £31,786-£121,200 £42,123

Please note that these figures are purely theoretical and may not apply to your own personal tax circumstances as there may be other factors affecting your personal allowances and taxable income. This is just intended as a basic guide to illustrate how the personal allowance decreases after your earnings exceed £100,000.

Please take financial advice if you are in any doubt about your own personal tax circumstances.


Marriage Allowance – A Misnomer?

So there has been a lot of talk about the new marriage allowance – which is what the government are calling it – but should it really be called that? In the past allowances have most often been amounts of money that you can use to offset against your earnings to enable you to pay more tax.

There was a marriage allowance in the past which was called the ‘married couple’s allowance’ which was given to anyone who was married basically. Nowadays this old allowance is only valid for those people born before 1935 so the numbers are ever dwindling as to who is receiving it. This was a much more generous allowance too and did not depend on income.

The new ‘marriage allowance’ to my mind is a bit of a misnomer – it is not really an extra allowance but instead a transfer of one person’s existing allowance that they are not using, to the other partner in the relationship. In addition to that, you can only transfer it if your partner is not earning in the 40% tax bracket.  So really the allowance is more of a transfer than an actual allowance.

At the moment it is also not too easy to claim the allowance as the only way you can do so is online and with the correct documents – which many people may not have. if you don’t have these then there should be a telephone helpline opening up later in the year and all payments will be backdated so that no-one will lose out.

To find out more about the new marriage allowance, including how to claim it, check out our previous article on the subject.

What You Need To Know About UK Tax Allowances