How you can earn £17k tax free! Cash in on higher personal allowance and new tax year's savings and dividend rules
- New tax year starts today
- Workers can earn £11,000 without having to pay tax
- Most savings interest will now be tax free
You can earn up to £17,000 a year tax-free thanks to three major changes taking effect today.
For the latest tax year — which began this morning and ends on April 5, 2017 — you will have a higher personal allowance, plus new personal savings and dividend allowances.
These are available in addition to any sums earned from cash or investment Isas, which are automatically tax-free.
About 1.5 million people are set to benefit from the new rules and roughly half of those will save more than £50 a year in tax, according to government estimates.
Here’s how the £17,000 adds up. It all depends where your income comes from.
Windfall: Changes for the news tax year mean Britons can now earn up to £17,000 a year tax-free
First, your standard personal allowance has increased from £10,600 to £11,000. This is the amount of income you can earn from any source — work, pensions or savings — before tax is owed.
Also, you won’t start paying the higher 40 per cent rate of tax until your income breeches the £43,000 mark, up from £42,385.
However, there is bad news if you’re aged over 78. The slightly higher personal allowance for those born before April 6, 1938, has been scrapped. Now you have the standard £11,000.
Second, your new personal savings allowance takes effect today. It entitles basic-rate taxpayers to the first £1,000 interest earned tax-free. Higher-rate payers have a £500 allowance. Additional rate 45 per cent payers get nothing.
Historically, 20 per cent tax was deducted from interest before it was paid. But banks, building societies and National Savings & Investments will no longer do this — meaning you won’t have to claim anything back.
You can add this allowance to your £11,000, making £12,000.
Third, there is a new dividend allowance. Effectively, you don’t pay any tax on the first £5,000 dividend income from shares outside an Isa.
These are the payments firms make as a thank-you to shareholders several times a year.
The dividend allowance replaces the archaic dividend tax credit system, where all dividends were tax-free for basic-rate taxpayers, but higher-rate payers faced a 25 per cent levy. Additional rate payers faced 30.56 per cent.
Add this to your other entitlements and it takes your tax-free allowance to £17,000.
Warning: HMRC often uses out-of-date information to work out how much interest people are receiving
WHAT HAPPENS IF I GET PAID MORE?
Working out how much tax to pay, if any, is complicated. Most people who work for a company are taxed before their wage is paid. This is the Pay As You Earn system.
Unless there is an error, you shouldn’t have to lift a finger. But if you have complicated tax affairs or are self-employed, you’ll need to fill out a self-assessment tax return. The deadline is October 31 for paper returns and January 31 online.
If you owe tax on savings, you will be charged in the same way. HMRC will adjust your tax code to take money directly from your wages or pension if you do not already fill in a tax form.
But check that its figures are correct. Money Mail has discovered the tax office is routinely using out-of-date information to work out how much interest people are receiving.
If you owe tax on share dividends, you’ll have to declare them on a tax return. Basic-rate taxpayers will owe 7.5 per cent on any dividends over the £5,000 limit if they’ve exhausted their £11,000 personal allowance.
The rate is 32.5 per cent for higher-rate taxpayers. Additional rate payers lose 38.1 per cent to tax.
This means that a basic-rate taxpayer with a pension of £20,000 and non-Isa dividends of £6,000 faces a £75 tax bill on the dividends, or 7.5 per cent of £1,000.
LOOK OUT FOR THE CATCHES
Savings interest is counted as part of your income for working out what level of tax you pay. This can push you up to a higher tax bracket and cause problems.
So, if you have a salary of £42,500 and earn £1,000 in savings income, your total income is £43,500.
This will push you from the 20 per cent basic-rate taxpayer band into the higher-rate 40 per cent bracket.
That means your savings allowance will drop to £500 from £1,000. So, you will pay tax on £500 of savings.
A more useful quirk in the system is the ‘starting rate’ of tax for savings.
If your total income from non- savings earnings — pensions, salary, rental income — is less than £17,000, you can earn another £5,000 from savings without paying any tax.
This is a special tax perk for lower-earners who rely on the interest from their nest eggs. Most of those who will claim this are pensioners.
Say your income from pensions is £15,000 and you earn £3,000 from your savings — a total of £18,000.
You can add the ‘starting rate’ £5,000 to your £11,000 personal allowance before you need to pay tax on your savings.
This gives a £16,000 starting amount for savings tax.
If you add your new £1,000 personal savings allowance, it takes the starting amount for savings tax to £17,000. That means you owe 20 per cent tax on the £1,000 of savings interest above this level, giving a tax bill of £200.
You will still have paid tax on £4,000 of your pension (£15,000 less your £11,000 personal allowance).
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