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.

 

Do High Earners Get a Personal Allowance?

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.

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.

E&OE

What You Need To Know About UK Tax Allowances