The impact of Covid-19 has affected each family differently. Those who have lost their jobs, seen profits from a business plummet, been on furlough or reduced pay have borne the economic brunt of the lockdown. There may be some silver lining, if a reduced income means that tax breaks and benefits for which the individual did not previously qualify are now available. Here is a quick guide to some of the income tax allowances and benefits.
Income Tax Breaks
Some income tax allowances are offered or withdrawn when income is below or above certain bands, so a lower income in one year can mean that tax allowances or other benefits become available.
Most UK taxpayers are not taxed on the first £12,500 of their taxable income. This personal allowance is withdrawn gradually once annual taxable income is over £100,000. For each £2 over, £1 of the allowance is withdrawn, so that once over £125,000 of taxable income there is no personal allowance left, costing the taxpayer up to £5,000 per year.
If income falls below £125,000 then the allowance is restored on sliding scale so that the full £12,500 is available once income is below £100,000.
Pension savings and gift aid donations also reduce income for the purpose of calculating the withdrawal of the personal allowance.
Taxpayers have a tax -free allowance for savings income of £1,000 if a basic rate taxpayer and £500 if a higher rate taxpayer (income between £50,001 and £150,000) *. Those with income over £150,001 get no allowance. If a lower income means that the taxable income for the year falls below these thresholds, the tax -free savings allowance increases.
Where earned and property income is below £12,500 an additional £5,000 of savings income can be received with no tax to pay. The £5, 000 savings income allowance is reduced pro rata where taxable earned and property income is between £12,500 and £17,500. A drop in income could enable more savings income to be received tax free and ownership of savings accounts may need adjustment within the family to take full advantage of this.
Married Couples & Civil Partners
Married couples and civil partners, where one has taxable income below £12,500 (or £17,500 including taxable savings income), and the other is between £12,500 and £50,000 may claim marriage allowance. This is worth up to £250 in the current year. Couples who were eligible for this allowance in the previous four tax years may also claim arrears of up to £1,188 in total.
Families with Children
Most families with children under age 16 or in full time education to age 19, get tax free child benefit, worth £21.05 per week for the eldest and £13.95 per week for each younger child. Where one adult in the family has income in excess of £50,099, they pay tax on this benefit. Once income reaches £60,000 it is all clawed back in tax. This has led many families to waive the benefit rather than pay tax on it. If the high earner’s income has fallen, they may wish to reinstate their claim to tax free child benefit.
Tax Free Childcare
Where both parents are working a minimum of 16 hours per week and earning at least the National Living Wage/ Minimum Wage, help with paying for childcare for under 12s is available from HMRC.
The Government has temporarily removed the minimum income requirement for those receiving Job Support or Self Employment Income Support. The taxpayer subsidy can be up to £2,000 per year per child when added to the savings in the Tax- Free Childcare Account at a rate of 25% of personal savings.
If one adult has taxable income of more than £100,000, they are ineligible. Where a high earner has seen a drop in income below this level, applying for Tax Free Childcare may become an option. As a temporary measure the Government has allowed key workers to earn above £100,000 and remain eligible for the taxpayer subsidy.
To explore how you may benefit from these and other money saving ideas please contact your usual adviser or firstname.lastname@example.org
Public Policy Director
*England, Wales and Northern Ireland, Scottish resident taxpayers pay 41% tax on income between £43,430 and £150,000.
Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. The contents of this blog are for information purposes only and do not constitute individual advice. All information is based on our current understanding of taxation legislation and regulations. The Financial Conduct Authority does not regulate estate planning, tax advice, wills or trusts.Back to News & Views
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