Tax rates affect every worker. Even if you are not paying tax, there’s a reason that you’re not paying it. By understanding the latest personal tax allowance, you can ensure that your finances are on track. And, make sure that you are claiming everything that you are entitled to.
As well as knowing how much you should be paying, this is the ideal time to check if you have an entitlement to any tax reductions.
These are many ways to increase your personal tax allowances or reduce your tax bill by managing your money wisely.
2016 tax allowances
Every worker has a personal allowance. This is the amount that you are able to earn before you begin to pay income tax.
Even when you earn more than your personal tax allowance, you will not pay tax on the income that is wrapped within it.
As such tax is only paid on the income over your personal tax allowance threshold.
Additionally, from April 2016, the personal allowance in the UK is set at £11k.
Income tax bands
Your income will fall under the Basic Rate, Higher Rate or Additional Rate band.
- Basic Rate is set at 20%.
- Higher Rate is set at 40%.
- Additional Rate is set at 45%.
The lower threshold is £11,000. This means that you do not pay tax on any income under £11k.
- On income between £11,001 and £43,000, you will pay ‘Basic Rate’ tax at 20%.
- For an income between £43,001 and £150,000, you will pay ‘Higher Rate’ tax at 40%.
- On income above £150,000, you will pay ‘Additional Rate ‘tax of 45%.
When you go from one tax band into another, you do not pay the higher tax rate on all your income. The higher rate of tax is only applicable to any income over the threshold.
Adjusted personal tax allowance
In certain circumstances, people can have different tax allowances.
Your entitlement to a raised personal allowance may depend on your marital status or disability status.
The Marriage Allowance provides the opportunity for married couples to reduce their overall tax bill.
If one person is earning less than £11,000, then their spare personal allowance can be transferred to their spouse.
The Marriage Allowance allows couples to reduce their annual tax bill by up to £220.
Entitlement depends on being married or in a civil partnership. One person must be earning less than £11k. Finally, the other partner must be paying Basic Rate tax, earning between £11,000 and £43,000.
One person must be earning less than £11k. Finally, the other partner must be paying Basic Rate tax, earning between £11,000 and £43,000.
It is easy to apply for the Marriage Allowance online, but interestingly only 8% of eligible couples had made use of the allowance by early 2016. This meant that 3.7 million couples were missing out on a tax break that could make their households more tax efficient.
This meant that 3.7 million couples were missing out on a tax break that could make their households more tax efficient.
Blind person’s personal tax allowance
The Blind Person’s Allowance is an add-on, increasing someone’s personal tax allowance.
Anyone that is registered blind can claim entitlement to the allowance. Also, unused parts of the Blind Person’s Allowance can be transferred to a spouse or civil partner.
In 2016, the Blind Person’s Allowance is set at £2,290. This is added on to the Personal Allowance, meaning that someone can earn up to £13,290 before they will need to pay tax.
This cannot be applied for online. As the situation is more complex, eligible applicants must contact HMRC directly.
People with an income over £100,000 will find that it cuts into their personal tax allowance.
For every £2 earned, above £100,000, the personal allowance reduces by £1.
People earning more than £122,000 have no personal allowance. This means that they pay tax on every penny that they earn. They will pay 20% tax on all income below £43,000, and the relevant Higher and Additional rates for the rest of their income.
Being tax efficient
Everyone wants to make the most of their income. Paying tax is essential, but rarely an enjoyable experience.
Being tax efficient means making the most of your personal tax allowance, and managing your money effectively.
Check your tax code
You may be paying the wrong amount of tax. Check your tax code regularly.
You can use the ListenToTaxman tax calculator, to see how much you should be paying. This also takes into consideration any NI and student loan payments, to give you a clearer view of your take-home pay.
If you complete your own tax return, don’t leave it until the last minute.
Give yourself time to check your tax calculation, making sure that it isn’t inaccurate.
Whilst you don’t get a tax break for starting your self-assessment early, doing so will give you time to check that you’ve thought about everything.
Starting early gives you time to check your income and expenditure. Furthermore ensuring that you have claimed allowances for everything that you’re entitled to. There are tax-deductible expenses that you will not want to miss out on.
There are many tax-deductible expenses that you will not want to miss out on.
Before submitting your tax return, check every detail. Mistakes that you make may otherwise not be noticed, or become an unnecessary expense/ hassle.
There are many ways to maximise your income by being tax efficient with your savings.
When you invest money into your pension, it becomes tax-free.
Your tax is invested, so that Basic Rate taxpayers would have £100 put into their pension for every £80 that they contribute.
You could also invest your money into a tax-free wrapper, with an ISA. The ISA allowance is set at £15,240 in 2016, which means that you can save up to this amount without paying any tax on the interest.
In April 2016, the Personal Savings Allowance was introduced. With this, individuals can earn up to £1,000 of interest on any of their savings, before they need to start paying tax. This is separate from the ISA allowance.
Higher Rate taxpayers can earn up to £500, whilst Additional Rate taxpayers do not get this allowance at all.
The Personal Savings Allowance means that most people will not need to pay tax on any of their savings. For some, it can make the ISA allowance irrelevant. Other accounts may provide better interest rates.
If you are planning long-term and high-value savings, you may still benefit from an ISA. An ISA offers protection from interest indefinitely for any money within it.
Personal tax relief options
If you are a parent, you may wish to claim Childcare Vouchers if they are offered by your employer.
This is usually a salary sacrifice. You can trade some of your salary for Childcare Vouchers, to be used with a provider of your choice.
You do not pay tax or National Insurance on your Childcare Vouchers.
Charity donations and Gift Aid
If you are donating to charity, and are a Higher or Additional Rate taxpayer, then you may be able to claim some money back.
Gift Aid allows the charity to claim an extra 25% at no cost to you.
If you pay 40% or 45% tax, then you can claim back the difference. This means that you could claim back up to 20% tax on your charity donations. Money can be also claimed back through your tax return, or by contacting HMRC.
Monitoring your tax payments
If you are employed, you can check your tax code on your payslip.
You can also use the online service to check your tax code, personal allowance and estimates of how much tax you will pay in total.
Check your tax code at least once a year, to check that you have paid the right amount. If you have overpaid, you will be able to claim back.
If you are self-employed, then you are more in control. This is an extra responsibility, as you will need to make sure that you are providing all the right details. Ensure that you are claiming everything that you are entitled to, to minimise your tax bill.
Tax bands can change every year. The personal allowance usually increases annually.
By keeping up to date with current personal tax allowances, you can protect your financial interests and make the most of your earnings.