The impact of Covid 19 has devastated incomes and livelihoods. For some, a lower income may mean that tax breaks and benefits, previously unavailable, may now be claimed. Here is a quick guide to some of the tax allowances and benefits.
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 taxable income for the year falls below these thresholds, the tax-free savings allowance increases.
Savers with greater savings income may have had their PAYE code adjusted to automatically tax the interest received above these thresholds. Falling interest rates, as well as less earned income, could result in too much tax being paid. This can be reclaimed by filing a tax return via the Government gateway.
Where earned and property income is below £12,500 an additional £5,000 of savings income can be received tax free. 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.
In addition to this savings income allowance up to £2,000 of dividends per tax year are free of tax.
Most UK taxpayers pay 0% tax 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 This personal allowance is withdrawn gradually once annual taxable income is over £100,000. For each £2 over, £1 of the allowance is withdrawn, so that once over £125,000 of taxable income there is no personal allowance left, costing the taxpayer up to £5,000 per year.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 a sliding scale until the full £12,500 is available once income is below £100,000.
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, up to £1,188 in total.
Married couples and civil partners who transfer assets between each other have an exemption from capital gains tax and inheritance tax. Shares, unit trusts or property, held over the long term could contain substantial gains. If the gain, net of losses, is more than £12,300, it may be worthwhile to transfer ownership between spouses or civil partners before selling, so that both capital gains allowances of £12,300 each could be claimed.
It may be possible to benefit from a lower taxpayer having a lower tax liability. Gains are added to the taxable income for the year and taxed at 10% for basic rate taxpayers, or 20% for higher and top rate taxpayers (18% and 28% for residential investment property disposals).
Income from investments is usually taxed according to ownership, so changing ownership could help lower the overall tax bill.
Investment bond gains are subject to income tax, realising a gain in a year when income may be lower could be beneficial. This is a complex tax and taking advice before a disposal should be considered as tax outcomes can depend on how this is done.
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 at a rate of 1% for every £100 additional income. 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. Claims can only be backdated for 3 months.
Pension Savings and Gift Aid
Pension savings and gift aid donations act as an income reducer for tax purposes. Saving for retirement or supporting charity reduces the taxable income which counts when assessing eligibility for these allowances and benefits.
This article has been compiled on LEBC’s understanding of current HMRC Tax rates for tax year 2020/21.
The levels, bases and reliefs from taxation are subject to individual circumstances and may be subject to future change, The Financial Conduct Authority does not regulate taxation advice.
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