The new year may have only just begun, but the end of the current tax year is getting closer every day. There may still be three months left until April 5th, but the time left to make the most of your tax entitlements for 2017/18 is definitely running out.
We look at the key tax entitlements, and how you can make the most of them.
How much can you earn?
Your basic personal allowance for the current tax year is £11,500 which is the amount you can earn before you start paying tax. You pay tax at 20% on your salary from £11,500 to £43,000. If you earn £43,001 you pay higher rate tax at 40%, and 45% on any income above £150,000.
How much can you put in an ISA?
Each tax year the government sets an annual limit on how much you can put into an ISA. For the 2017/18 tax year you can invest up to £20,000. You can’t carry over your ISA allowance, so it’s a case of use it or lose it.
Interest rates are very low, and Cash ISAs don’t look very rewarding. You need to shop around, or you could consider moving away from cash savings and start investing. You can split your ISA allowance between a Stocks & Shares ISA and a Cash ISA, or even consider a Lifetime ISA (maximum £4,000) or an Innovative Finance ISA, providing you stay within your overall £20,000 limit.
Remember, the annual ISA allowance is per individual. This means that together, you and your spouse or partner can put up to £40,000 between you into ISAs this tax year.
What about cash savings outside an ISA?
The Personal Savings Allowance (PSA) means every basic-rate taxpayer can earn £1,000 interest each tax year without paying tax on it. So, if you can find a savings account paying 2%, you could put £50,000 in it. Higher tax payers have a £500 allowance. That’s still a £25,000 savings balance earning 2% interest.
Top rate taxpayers do not have an allowance at all, and will pay tax on all their savings.
Remember, it’s not just interest on savings accounts. Any interest you earn from bank accounts, savings accounts, credit union accounts, building societies, corporate bonds, government bonds and gilts counts towards your allowance. Even interest earned on other currencies held in UK based savings accounts.
What about your pension contributions?
The government want you to save for a pension, and encourages you with some very attractive tax concessions. However, there are limits to its generosity, and the Pensions Annual Allowance is currently set at £40,000 a year. Try to pay any more into your pension, and you’ll be hit with a tax penalty.
However, you can carry over unused allowance from the previous three tax years. This is where things get complicated.
The tax year 6 April 2015 to 5 April 2016 was split into two periods with different tax-free allowances. To see if you have any unused allowances that you can carry forward to the current tax year, you can see the government’s own tax allowance calculator here, or seek some help from our professional advisors.
If you are on a higher income, ‘taper’ rules apply. There’s a sliding scale that reduces your £40,000 annual allowance down to a minimum of £10,000. You’ll need to identify if your threshold income is more than £110,000 and your adjusted income is over £150,000 to calculate your exact allowance.
What about dividends?
If you are a business owner, or take an income from investments you will be aware that the position on dividends changed last year, and that the taxman is taking a larger share of the money you receive.
In the 2017/18 tax year, you will still receive a tax free allowance for dividends of up to £5,000. So, your first £5,000 of dividend income is tax-free. Above this, the rate is 7.5% for basic rate taxpayers, 32.5% within the higher rate tax band and 38.1% in the additional rate band.
Dividends are part of your income for personal tax when they are paid or when they are declared, whichever is earlier. If you run a business, you can declare dividends in this tax year to use your allowance, actually taking the money out of your business in the next tax year.
The 2017/18 tax year runs from April 6th 2017 to April 5th 2018, but the time to start ensuring that you are making the most of your entitlement is now.
If you have questions about your tax allowances, want to see the best ways to make the most of them or would like help to find an accountant to complete your return, please call us at Continuum today.
Capital at risk, the value of investments, and the income from them, can fall as well as rise.
Levels and basis of reliefs from taxation are subject to change and depend upon your personal circumstances.