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.
So with the start of the new tax year (2016/17), there comes a new Personal Savings Allowance. This means that you are allowed to earn a certain amount in savings interest without paying any tax on it.
The limits that are applicable for 2016/17 are:
£1,000 in savings interest for those who are basic rate taxpayers
£500 in savings interest for those who are higher rate taxpayers
So, due to this change, banks and building societies will no longer be deducting tax from your savings at the source. Instead, if you are liable to pay any tax on your savings due to them exceeding this amount, you will need to either pay the tax to HMRC via your self assessment tax return, or else they will collect it via your tax code.
Not only has the Personal Savings Allowance been introduced, but also those earning under £16,000 (including savings) may also be entitled to make use of all of part of the starting rate of 0% on £5,000 worth of savings interest.
For example, if you earn £9,000 in taxable income, then you can use the £5,000 savings interest allowance and the £1,000 personal savings allowance so you could effectively get £15,000 in tax free income.
Using the above example if you earned £11,000 in taxable income then the maximum you could earn and not pay tax is £17,000.
This obviously assumes that you have conveniently apportioned earnings from taxable income and savings but it is unlikely to be the case for the majority of people.
So if you earn more than £11,000 (the personal allowance for 2016/17) then you will only get some of the £5,000 starting rate if your earnings are below £16,000 – say you earn £13,000 then you can have £3,000 of the starting rate savings allowance.
But whatever you earn – as long as you pay basic rate tax or no tax at all – then you are allowed the £1,000 personal savings allowance.
This graphic may help illustrate the effect for basic rate taxpayers of the personal Savings Allowance (up to £1,000 in interest from savings) and the starting rate savings allowance (up to £5,000 for lower earners)
In green are your taxable earnings, in orange is the available 0% rate on £5,000 worth of savings for lower earners and in blue is the new personal savings allowance of £1,000 for all lower rate taxpayers.
Any savings that fall out of these brackets are taxable.
For higher rate taxpayers you can have £500 in savings interest tax free and anything over that is taxable at your highest rate.
The Chancellor of the Exchequer, George Osborne, today announced in his March 2016 Budget an increase in the personal allowance for 2017/18 which for 2016/17 stands at £11,000.
The personal allowance for 2017/18 has been set at £11,500 which is an increase of 4.5% over the previous year. This increase is to keep in line with the plan that the Conservative Party announced in the election manifesto to increase the personal allowance by the end of their term to £12,500.
This single level personal allowance now applies to people of all ages, including those over 75, as the age allowance for pensioners has been removed so that everyone is entitled to the same personal allowance.
*Update* – this was increased in the 2016 Budget to £11,500
The UK personal allowance is the amount that you are allowed to earn before you are subject to tax. You can also add on to this the personal savings allowance and the dividend allowance that could be applicable to some of your earnings.
So if you are wondering what is the UK personal allowance for the tax year 2017/18 then the figure you are looking for is £11,200.
This is an increase of £200 on the personal allowance from 2016/17 – equivalent to 1.8%.
There were previously other lower figures announced for 2017/18 (which you can still find reference to on the HMRC website which can make it confusing), but when the personal allowance was increased to £11,000 for 2016/17 this was a jump higher than had previously been announced and so figures beyond 2017 also needed to be amended.
Of course there is a small chance that this could be changed in the 2016 budget but it looks unlikely at this stage.
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 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.
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.
If you are a high earner then you may be questioning do high earners get a personal allowance? Well the answer really depends on what you class as a high earner as there are different answers depending on how much you earn.
You may be entitled to some or all of the personal allowance, which is the amount of earnings that is not subject to any tax.
A lot of people define high earners as those people who earn enough to pay higher rate tax so we wills tart with them. Anyone who earns enough to pay higher rate tax but who does not earn over £100,000 a year is entitled to the full personal allowance for that tax year.
However, once your earnings go above £100,000 for the tax year, the personal allowance starts to get taken away. It is reduced by £1 for every £2 of earnings above £100,000. So for example, if the personal allowance is £11,000 then anyone earning over £122,000 would not be entitled to any personal allowance and all of their earnings would be taxable.
If your earnings are £105,000 then you will only be entitled to £8,500 of personal allowance. This is calculated by dividing the excess earnings over £100,000 by 2 (5000/2 = 2500) and deducting that from the full personal allowance.
Earnings include any kind of benefits in kind as well as your salary but if you are in any doubt you should contact your accountant or HM Revenue for clarification.
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.
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.