The introduction of personal savings allowance and the dividends tax allowance introduced by the previous Chancellor of the Exchequer, George Osborn, has complicated the effective allocation of personal tax allowances.
The order in which personal allowances are applied to income has not changed and is generally thus.
HMRC guidelines dictate that the allowances and reliefs should be offset in the same hierarchy against non-savings income, savings and then dividends. However, the complications introduced by George Osborne mean that in many cases it is not advantageous to offset the allowances and reliefs in that order.
It can be be advantageous to set off personal allowances against dividends in priority to non-savings income (earnings) and interest. This is possible because Section 25 of the Income Tax Act 2007
allows the taxpayer to “deduct the reliefs and allowances in the way which will result in the greatest reduction in the taxpayer’s liability to income tax”.
|Obvious Method||Most Advantageous|
|Income||Tax Rate||Tax Due||Income||Tax Rate||Tax Due|
|TOTAL SAVING OF £625 – 8.9%|
All income tax rates and allowances can be found here
It is important to note that many tax software packages do not have the option to calculate the most advantageous way to allocate allowances. They follow HMRC guidelines for their software to be approved. HMRC calculations are based on the traditional method. Consequently,their accuracy has been questioned and they are aware of the discrepancy.
Savings Interest Allowance
The new savings interest allowance is more complicated.
The 0% band for 2016/17 & 2017/18 is restricted by non-savings taxable income. None of the band will be available if that income is above the personal allowance plus the 5% starting rate.
Additionally, in April 2016 the Personal Savings Allowance was introduced as £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate taxpayers are not eligible.
The two allowances work together and are dependent on total taxable income.
From April 2016, all savings income was paid gross
The easiest way to establish if you qualify is to add up your non-savings income. If it is below or within your personal allowance plus £5,000, £16,500 2017/18 then the Starting Rate for Savings will apply.
If this doesn’t cover all savings income then apply the Personal Savings Allowance. To determine which rate to use add up all your taxable income including savings income. If it’s £45,000 (£43,000 in Scotland) or less then use £1,000, if between £45,001 (£43,001 in Scotland) and £150,000, use £500. If higher it doesn’t apply.
In conclusion you can see above the effective allocation of personal allowances, needs to be given careful consideration. Ensure that your liability to income tax is reduced as much as is legally possible.
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