Most investors are aware that they can invest in Individual Savings Accounts and the income and gains made will be tax free. The more adventurous can also earn tax free income and gains by investing in start up companies via a Venture Capital Trust, while accepting a high risk of loss of capital. What is less well understood is the scope to earn from investments tax free, outside of these tax privileged wrappers.
Here is a brief overview of the tax free allowances available to UK resident taxpayers. These allowances are available to minors as well as adults. For income tax this applies so long as the source of capital is not from a parent, if the parent’s capital is providing the income, only £100 is tax free, the excess is taxed as the parent’s income.
Personal Income Tax Allowance
All UK resident persons who have total taxable income of less than £100,000 have a tax free allowance of £11,850 (2018/19). Those with taxable income in excess of £100,000 lose £1 of the allowance for every £2 they receive over this threshold. Once income exceeds £123,700 the allowance is nil.
Starting Rate of 0% (not in Scotland)
If all taxable earned income does not exceed the personal allowance, there is an additional £5,000 allowance for income from savings. This is known as the starting rate of tax and the rate is 0%. If earned income, eg wages and pensions, are more than £16,850 you get no starter rate for savings income. If your other taxable income is between 11,850 and 16,850 the starter rate for savings is reduced by £1 for every £1 your other income exceeds £11,850.
Savings Income Allowance
In addition to the allowances mentioned above, each person may earn interest on savings which is tax free up to £1,000 for those whose income does not exceed the 20% band (£46,350 2018/19, £43,430 in Scotland) and £500 for 40% (41% in Scotland) taxpayers whose earnings must not exceed £150,000. Top rate taxpayers do not receive this allowance.
Dividends Income Allowance
This allowance enables investors to receive up to £2,000 in dividends, in addition to the other allowances they may qualify for, before any income tax is due. It was set at £5,000 in the previous two tax years but has fallen to £2,000 for 2018/19.
The first £1,000 of income from self employment is also tax free. This allowance was introduced to enable those trading in the digital economy to retain small amounts of tax free income, for example, online publishing, Ebay traders, casual gardening or child care, secretarial support.
Property Income Allowance
The first £1,000 of income from short term lets and Airbnb type arrangements or letting of land is also tax free. This is not available if claiming rent a room allowance which is £7,500 when you let a room to a lodger in our own home. Where property is jointly owned each owner can claim the £1,000 allowance.
Where the total taxable income of one spouse or civil partner does not exceed the personal allowance of £11,850 and their spouse or civil partner is a 20% taxpayer (taxable income up to £46,350 (2018/19) they may transfer 10% of the allowance £1,185 to the higher earner thus saving £237 of income tax. This can be claimed for the current year and if applicable backdated for the previous 3 years. Claiming for all 4 years, if eligible, would produce a tax refund of £1,032.
Each person has an allowance for capital gains of £11,700 (2018/19). Only when gains, minus losses, exceed this figure is tax payable. Losses made in earlier years can be carried forward indefinitely and offset against future gains but cannot be carried back.
Married couples and civil partners can transfer assets which have made gains between each other, before they realise those gains, without paying tax. This enables larger gains made by one partner to be shared so that both allowances can be used before tax is payable.
If an individual is able to use the personal allowance, starting rate of tax, savings allowance and dividends allowance they may earn income of £19,850 (£14,850 in Scotland) from investments without paying any tax. They may also earn gains of £11,700 net of losses before any capital gains tax is due.
A combination of investments, producing income and gains, could provide up to £31,550 (£26,550 in Scotland) before any tax is due and in addition to income or growth achieved within tax privileged investments or from property and trading allowances.
Director of Public Policy, LEBC
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. This does not constitute individual tax advice and should not be relied upon as advice. Tax rates and allowances may change in the future and should tax planning be required individual advice should be sought. The FCA does not regulate tax advice. If you are unsure of the suitability of any investment or product for your circumstances please contact an adviser.Back to News & Views