Income Tax
 |
The tax year runs from 6th April to the following 5th April. Tax rules, rates and allowances change every year, but the changes are often known about well in advance.
Tax Rates -
Personal Allowance -
Personal Savings Allowance -
Tax Codes
Taxable Income - Taxed and Untaxed benefits
Tax Rates
From gov.uk,
| 2015/16 | 2016/17 | 2017/18 | ||||
|---|---|---|---|---|---|---|
taxable income |
%age rate |
taxable income |
%age rate |
taxable income |
%age rate |
|
| Personal Allowance | to £10,600 |
0% |
to £11,000 |
0% |
to £11,500 |
0% |
| Basic Rate | £10,601-£31,785 |
20% |
£11,001-32,000 |
20% |
£11,501-£45,000 |
20% |
| Higher Rate | £31,786-£150,000 |
40% |
£32,001-£150,000 |
40% |
£45,000-£150,000 |
40% |
| Additional Rate | £150,000+ |
45% |
£150,000+ |
45% |
£15,000+ |
45% |
Personal Allowance
Income up to the personal allowance is not taxed. Tax on income in excess of the personal allowance is payable at the rates shown above. Note that the personal allowance is higher for those born before 5th April 1938, lower for those with income over £100,000 and that tax on interest and dividends is treated differently. Some unused personal allowance can be transferred between married couples and there is a married couple's allowance for those born before 6th April 1935.There is also a Blind Person's Allowance. Scotland can set its own tax rates from April 2016.
Personal Savings Allowance
This is a new allowance from April 2016, aimed to simplify the taxation of savings interest, but which has caused some initial confusion.
Basic Rate taxpayers will be able to earn £1,000 of interest tax free (for higher rate taxpayers it is £500 and for additional rate taxpayers, nothing).
This means that banks and building societies † will make payments of interest gross, rather than deducting income tax at the basic rate which was the previous default.
It is claimed that this will result in 95% of people no longer paying tax on savings income and for those in that category this change will be good, but if HMRC expects you to earn more than £1,000 interest (less for higher rate tax payers), they will issue a Notice of Coding that includes a restriction for the excess and if this is overestimated, that will mean excessive deductions from other sources of income under PAYE so check your Coding and ask for a change if interest is overestimated..
† Savings income is defined as that received from banks, building societies, credit unions, National Savings (NS&I), peer-to-peer lending (e.g. Zopa), governmant or corporate bonds, interest (but not dividends) from investment funds or trusts and most types of purchased life annuity. In the case of joint accounts, the interest is shared between the account holders.
Tax Codes
Notices of Coding are issued by HMRC to employers and other bodies to control the amount of tax deducted under PAYE from earnings and private pensions, the intenion being to allocate personal allowances and try to deduct the correct amount of tax during a tax year. They do not always work and are particularly susceptible to errors when something changes, such as employment or marital status.
The code usually comprises and number and a letter:
- The number is the amount of personal allowance (divided by 10) allocated to a particular source of income.
- The letter gives further information on the way the personal allowance has been allocated.
| Letter | Meaning |
|---|---|
L |
The basic tax-free Personal Allowance, e.g. 1060L |
M |
Marriage Allowance: you’ve received a transfer of 10% of your partner’s Personal Allowance |
N |
Marriage Allowance: you’ve transferred 10% of your Personal Allowance to your partner |
Y |
You were born before 6 April 1938 and entitled to a larger full tax-free Personal Allowance |
T |
Your tax code includes other calculations to work out your Personal Allowance, eg it’s been reduced because your income is over the amount for basic rate tax |
OT |
Your Personal Allowance has been used up, or you’ve started a new job and don’t have a form P45, or you didn’t give your new employer the details they need to give you a tax code |
BR |
All your income from this job or pension is taxed at the basic rate (usually used if you’ve got more than one job or pension) |
D0 |
All your income from this job or pension is taxed at the higher rate (usually used if you’ve got more than one job or pension) |
D1 |
All your income from this job or pension is taxed at the additional rate (usually used if you’ve got more than one job or pension) |
NT |
No tax is deducted |
K |
At the beginning, you have other income greater than your Personal Allowance and so tax is deducted at more than the Basic Rate. The tax deducted in this way cannot be more than 50% of the gross amount. |
W1 or M1 |
These are emergency tax codes for weekly (W1) or monthly (M1) pay. They are usually used on a change of job and are replaced by new calculated codes when the employer receives the P45 from the previous employment. |
Taxable Income
From gov.uk
"You pay tax on things like:
- money you earn from employment
- profits you make if you’re self-employed - including from services you sell through websites or apps
- some state benefits
- most pensions, including state pensions, company and personal pensions and retirement annuities
- interest on savings and pensioner bonds
- rental income (unless you’re a live-in landlord and get £4,250 or less)
- benefits you get from your job
- income from a trust
- dividends from company shares
You don’t pay tax on things like:
- income from tax-exempt accounts, like Individual Savings Accounts (ISAs) and National Savings Certificates
- some state benefits
- premium bond or National Lottery wins
- the first £4,250 of rent you get from a lodger in your home"
Taxed and Untaxed Benefits
From gov.uk,
State benefits that are taxable
"The most common benefits that you pay Income Tax on are:
- the State Pension
- Jobseeker’s Allowance
- Carer’s Allowance
- Employment and Support Allowance (contribution based)
- Incapacity Benefit (from the 29th week you get it)
- Bereavement Allowance
- pensions paid by the Industrial Death Benefit scheme
- Widowed Parent’s Allowance
- Widow’s pension
Tax-free state benefits
The most common state benefits you don’t have to pay Income Tax on are:
- Housing Benefit
- Employment and Support Allowance (income related)
- Income Support - though you may have to pay tax on Income Support if you’re involved in a strike
- Working Tax Credit
- Child Tax Credit
- Disability Living Allowance
- Child Benefit (income based - use the Child Benefit tax calculator to see if you’ll have to pay tax)
- Guardian’s Allowance
- Attendance Allowance
- Pension Credit
- Winter Fuel Payments and Christmas Bonus
- free TV licence for over-75s
- lump-sum bereavement payments
- Maternity Allowance
- Industrial Injuries Benefit
- Severe Disablement Allowance
- Universal Credit
- War Widow’s Pension
- Young Person’s Bridging Allowance"
Subject
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