Sarah Bradford explains how it can be possible to receive up to £23,100 tax-free in 2016/17, depending on the nature of your income and by making the best use of your allowances.
An individual taxpayer has a number of allowances at his or her disposal for 2016/17. These include the personal allowance, the personal savings allowance and the dividend allowance.
The personal allowance is set at £11,000 for 2016/17. The allowance is available to all taxpayers, but it reduced by £1 for every £2 by which adjusted net income exceeds £100,000. This means in reality that anyone with adjusted net income of £122,000 and above for 2016/17 does not receive the personal allowance.
Personal savings allowance
The personal savings allowance is new for 2016/17. It is set at £1,000 for basic rate taxpayers and at £500 for higher rate taxpayers. Taxpayers paying tax at the additional rate do not receive a personal savings allowance. The allowance is available to set against taxable savings income.
Savings nil rate band
A nil rate band of £5,000 is available for savings income for 2016/17, in addition to the personal savings allowance. However, this is only available to the extent that taxable non-savings income does not exceed £5,000. Where a taxpayer has taxable non-savings income of less than £5,000, the savings nil rate band is reduced by the amount of the taxable non-savings income.
As part of the reforms of the taxation of dividend income with effect from 6 April 2016, a dividend nil rate (or ‘allowance’) is available from 2016/17 onwards. The allowance, which is set at £5,000, is available to all taxpayers regardless of their marginal rate of tax. Although it is termed an allowance, it is really a nil rate band, which works to tax the first £5,000 of taxable dividend income at a 0%. Unlike a true allowance, the dividend allowance is treated as forming part of band earnings.
The marriage allowance is available to married couples and civil partners and allows an person to transfer 10% of their personal allowance to their spouse or civil partner, provided neither party pays tax at the higher or additional rate. This is beneficial where one spouse or civil partner is not able to fully utilise their personal allowance and their spouse or civil partner is a basic rate taxpayer.
For 2016/17, the marriage allowance is £1,100 (being 10% of the personal allowance of £11,000).
Putting it all together
Depending on the nature of your income, it is possible to receive up to £23,100 tax-free by making the most of the allowances and nil rate bands outlined above.
However, this is only possible if the taxpayer:
- has taxable non-savings income of no more than £11,000;
- has savings income of at least £6,000;
- has dividend income of at least £5,000;
- does not pay tax at the higher or additional rate; and
- benefits from the marriage allowance.
Where this is the case, it is possible to use the personal allowance of £11,000, the personal savings allowance of £1,000, the marriage allowance of £1,100 and the dividend allowance of £5,000 to shelter income while taking advantage of the £5,000 savings starting rate – a total of £23,100.
Example: Making the most of allowances, etc.
For 2016/17, Edith receives a pension of £9,000, interest of £8,000 and dividends of £6,100. Her husband Albert receives a pension of £8,000. As Albert is unable to fully utilise his personal allowance for 2016/17 of £11,000, the couple claim the marriage allowance and transfer 10% (£1,100) of Albert’s personal allowance to Edith.
Edith’s tax computation for 2016/17 is as follows:
Total (£) Non savings Savings Dividend
Income income income
23,100 9,000 8,000 6,100
Personal allowance (11,000) (9,000) (2,000)
Personal savings allowance (1,000) (1,000)
Dividend ‘allowance’ (5,000) (5,000)
Marriage allowance (1,100) (1,100)
Taxable income 5,000 0 5,000 0
Taxed at savings starting
rate of 0% 0
The remainder of the savings income of £5,000 not sheltered by allowances is taxed at the 0% savings starting rate, so no tax is actually payable.
This means that Edith has received £23,100 tax-free in 2016/17.
Other allowances – even more tax free?
If the taxpayer is able to benefit from other allowances, such as the blind person’s allowance or the married couple’s allowance (either party to marriage must be born before 6 April 1935), it may be possible to receive even more tax-free.
Allocate your personal allowance in the most beneficial manner to maximise your tax-free income.
This article was first printed in Tax Insider in September 2016.