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With ever changing tax legislation, it’s a good idea to get up to speed on the most common income tax allowances.

Personal allowance

This is the amount that you can earn per year without paying income tax, regardless of your age.  However, if your income is above £100,000, your allowance is reduced.

Earning bracket 2017/18 personal allowance
Under £100,000 £11,500
£100,000 to £123,000 £11,500 decreased by £1 for every £2 earned
Over £123,000 £0


Dividend allowance

The dividend allowance means that you don’t pay tax on the first £5,000 of your dividend income.  Unlike your personal allowance, this allowance doesn’t reduce your taxable income, counting instead towards your basic and higher rate tax bands.

If your children are 18 years old or over, and you’re supporting them out of taxed income, it can be a good idea to consider gifting some shares to them.

For example, if you pay tax at the additional rate of 38.1%, then you need to earn £8,078 to give your child £5,000.  This means that HMRC gets £3,078 of your hard earned money.

Savings allowance

Since April 2016, your savings interest has been paid to you tax-free, as you became entitled to the personal savings allowance.

Basic rate taxpayers can receive £1,000 of interest tax free.  Higher rate tax payers have a £500 allowance, and additional rate payers get no allowance at all.

If you receive interest from an ISA account, this is always received tax free and doesn’t count towards your allowance.

Most of us do not earn the level of interest needed to fully utilise our savings allowance.  However, it is possible to earn additional interest if you are a director/shareholder of your own company.

You may have previously lent the company money that you are owed back, otherwise known as a directors’ loan account.  You could charge the company interest on the money that it owes to you, and receive this cash tax free by using your savings allowance.

How much income tax do I pay?

Now that you know your personal and savings allowance, any further earnings are subject to income tax, known as your taxable earning.  These earnings are subject to your marginal income tax rate:

Taxable earnings 2017/18 tax rate
Basic rate – Up to £33,500 20%
Higher rate – Between £33,500 – £150,000 40%
Additional rate – Over £150,000 45%

 

For example, if you had taxable earnings of £40,000, £33,500 would be taxed at 20% and the remainder at 40%.

It is possible for these income tax bands to be extended if you make contributions into your pension, or charitable donations under gift-aid.

Marriage allowance

The marriage allowance lets you transfer, or receive, £1,150 of personal allowance to/from your spouse or civil partner.

This is not given to you automatically, instead a claim will need to be submitted.  To qualify for this, one person needs to be earning £11,500 or less, and the other earning more than £11,500 but less than £45,000.

Overview

You can see that if you use all of your allowances wisely, you can earn up to £17,500 without paying any tax.

Also, structuring the way you are paid from your company can affect your personal tax liability.  If you have any questions, please do not hesitate to contact Michael Burgess or Rebecca Thorley on 01782 279615 to discuss your remuneration strategy.


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