What is Personal Allowance?

As per Cambridge dictionary meaning; personal allowance means an amount of money that you can earn before you start to be taxed.

In UK Tax system, tax on your personal income is levied after a certain threshold. Anyone who earns below this threshold in a particular tax year does not pay income tax for that particular year; otherwise income tax is paid on how much you pay over and above this particular threshold. The threshold, above which income tax is levied, is known as Personal Allowance, also called as tax free allowance. Certain residents are entitled to a larger personal allowance as compared to others, such as blind people, married couple in which at least one of the member was born before 6th April 1935 and if you are above 65 years.

What is Personal Tax Allowance

Personal allowance, which is good news to the citizens, is a major disappointment to Her Majesty’s Revenue & Customs (HMRC) because it is the money which you are allowed to earn without paying any income tax on it. However, personal allowance is not fixed for everyone and it generally depends on two factors:

  1. Your age.
  2. Your total income.

How much tax you pay in one particular tax year depends on two factors:

  1. What is your income above your Personal Allowance?
  2. How much of your income falls within each tax band?

For example:

Steve works as a freelance web designer and he wants to understand how much tax he has to pay for the year 2017-18. In order to understand this, he needs to know two important things: a) His personal allowance for the year 2017-18 and b) His total income for the year 2017-18.

If his net total income for the year 2017-18 is £28,000 and his personal allowance entitlement is £11,500. In this case, his taxable profit is:

£28,000 - £11,500 = £16,500 i.e. Steve will pay income tax only on £16,500, rather than £28,000.

How Much The Personal Allowance Has Changed From The Year 2016/17 to the Year 2017/18?

Personal Allowance Changes From 2016/17 to 2017/18

UK Government revises the tax free allowance amount considering various factors and it varies from section to section, such as:

Allowance 2016/17 2017/18 Change
Basic £11,000 £11,500 +£500
People born between 6th April 1938-5th April 1948 £11,000 £11,500 +£500
People born before 6th April 1938 £11,000 £11,500 +£500
Married Couples Allowance (if one of the partner was born before 6th April 1935) £8,355 £8,445 +£90
Blind Person’s Allowance £2,290 £2,320 +£30
Marriage Allowance £1,100 £1,150 +£50

It was from the year 2016-17, from which all individuals were entitled for the same personal allowance, irrespective of their age, which was £11,000 and was further increased to £11,500 for the year 2017-18. However, this personal allowance is subject to the £100,000 income limit, which is applicable and same for all individuals, irrespective of their date of birth. In case your income is above this declared limit of £100,000, your personal allowance will be reduced by £1 for every £2 above the limit.

What is the Personal Allowance and Income Limit for Previous Years from 2012-13 to 2017/18?

Tax Year Personal Allowance Income Limits
2017-18 £11,500 £100,000
2016-17 £11,000 £100,000
2015-16 £10,600 £100,000
2014-15 £10,000 £100,000
2013-14 £9,440 £100,000
2012-13 £8,105 £100,000

In the year 2017-18, UK Government increased the tax free allowance by £500 and this step was for sure a huge respite for the families with low income whereas the upper limit on income i.e. £100,000 was as it was for the year 2016-17..

What are Various Tax Brackets and How Much Does It Changed for the Year 2017-18 from Previous Year 2016-17?

Tax Rate 2016-17 2017-18 Change
Basic Rate 20% £0-£32,000 £0-£33,500 widened by £1,500
Higher Rate 40% £32,001 - £150,000 £32,001-£150,000 cut by £1,5000
Additional Rate 45% £150,001+ £150,001+ no change

The increase in the basic tax rate bracket and in the personal allowance allows you to earn more for the year 2017-18 before you start paying income tax. For example, for the tax year 2017-18, if you add your personal allowance i.e. £11,500 to the basic rate threshold i.e. £32,000, it is clear that you can earn £43,500 before you enter higher tax rate bracket, which is approx £615 higher than what you could have earned for the year 2016-17. There was no change in the tax rate though.

Factors Affecting Personal Allowance:

It was in 2016-17 when the personal allowance was made common for all, irrespective of their date of birth. However, before this, there were certain factors which had to be considered before calculating an individual’s personal allowance, such as:

  1. Age Allowance: Age allowance was available only up to 5th April 2016 and there were two levels of age allowance: One was for those who were born between 6th April 1938 and 5th April 1948 and other one was for those who were born before 06th April 1938. This allowance was mainly to target old tax payers who were also on the lower side of the income. For those who were above 65 years of age, if their income was below a set limit of £27,000 for the year 2015-16, you were entitled for the full allowance. However, in case if there is a change in your circumstances and your income goes above £27,000, your personal allowance will reduce and for every £2 of extra income, your personal allowance will reduce by £1.

    For example: If your income is £27,500 and your age is 78 years, your personal allowance will be reduced by £250 i.e. you will get £10,600 - £250 = £10,350.

  2. Marriage Allowance: From 06th April 2015 on-wards, it became possible to transfer 10% of the unused personal allowance between them and the allowance which was transferred between the couple was called as marriage allowance and is different from the married couple allowance. For the year 2017-18, the allowable allowance which you can transfer to your partner as £1,150 whereas for the year 2016-17, this allowance was restricted to the amount £1,100.

    However, there are certain conditions which need to be fulfilled, such as:

    1. You are married to each other or are civil partners to each other.
    2. You and your partner, both should be below tax bracket of 40% and additional 45% tax.
    3. You cannot claim both marriage allowance and married couple allowance. However, if one of the members is above 81 years of age, you have to claim married couple allowance, instead of marriage allowance. In order to claim the marriage allowance, the partner with the lower income should be claiming the allowance and you need to be ready with the certain details at your end before you claim for the same from HMRC, such as:

      1. Last 4 digits of an account which pays you the interest.
      2. Last 4 digits of the account that your child benefit, tax credits or pension is paid into.
      3. Details from your year end pay and tax summary form P60.
      4. National Insurance Number of self and your partner.
  3. Married Couple Allowance: In order to qualify for this particular allowance, at least one of the members must have been born before 06th April 1935 so it means that it is now available to couples where one couple must be at least 81 years of age on 05th April 2016 and this allowance is different than all the other allowances because it is also given as a reduction to the tax bill.

    Married couple allowance for the year 2017/18 is £8,355 whereas for the year 2016-17 and 2015-16 it was £8,355 and £8,165 for the year 2014-15, however there was a minimum amount which you would get irrespective of your income.

  4. Blind Person’s Allowance: To get this allowance, you need to be registered blind with a local recognized authority in England and Wales, whereas in Scotland and Ireland, you are entitled for this allowance if you are unable to perform any work which requires your eyesight. For the year 2017-18, blind person’s allowance is £2,320 and it was same for the year 2016-17 as well. This allowance is given in addition to the age allowance or usual personal allowance and in case a blind person who has not used this allowance can transfer it, either in total or a part of it to his spouse or to his civil partner.

Personal Allowance for the Year 2017-18:

Personal Allowance for the Year 2017-18

There was further increase in the personal allowance for the year 2017-18 and the threshold amount up to which you don’t have to pay any income tax is now £11,500 whereas it was £11,000 for the year 2016-17 and £10,600 for the year 2015-16.

Income Tax Rates and Bands for the year 2017-18:

For the year 2017-18, since there was an increase in the personal allowance amount, there was slight change in the income tax bands as depicted in the table below:

Band Taxable Income Tax Rate
Personal Allowance Up to £11,500 0%
Basic Rate £11,501 to £45,000 20%
Higher Rate £45,001 to £150,000 40%
Additional Rate Over £150,000 45%

With the increase in the personal allowance, income tax payers, employers and pension providers are likely to get affected.

Tax Rate 2016/17 2017/18 Change
Basic Rate 20% £0-£32,000 £0-£33,500 Widened by £1,500
Higher Rate 40% £32,001- £150,000 £32,001-£150,000 Cut by £1,5000
Additional Rate 45% £150,001+ £150,001+ No Change

The increase in the basic tax rate bracket and in the personal allowance allows you to earn more for the year 2017-18 before you start paying income tax. For example, for the tax year 2017-18, if you add your personal allowance i.e. £11,500 to the basic rate threshold i.e. £33,500, it is clear that you can earn £45,000 before you enter higher tax rate bracket. There was no change in the tax rate though and it was only the bracket which underwent changes.

Change in the Personal Allowance for the year 2017-18 from the year 2016-17:

Allowance 2016/17 2017/18 Change
Basic £11,000 £11,500 +£500
People born between 06th April 1938-5th April 1948 £11,000 £11,500 +£500
People born before 6th April 1938 £11,000 £11,500 +£500
Married Couple Allowances £8,355 £8,445 +£90
Blind Person’s Allowance £2,290 £2,320 +£30
Marriage Allowance £1,100 £1,150 +£50

For the year 2017-18, the allowable allowance which you can transfer to your partner increased to £1,150 against £1,100 for the year 2016-17 and £1,060 for the year 2014-15.However, there are certain conditions which need to be fulfilled, such as:

  1. You are married to each other or are civil partners to each other.
  2. You and your partner, both should be below tax bracket of 40% and additional 45% tax.

There was change in the age related income limit as well for the year 2017-18 and it was revised to £28,000 which earlier was £27,000 for the year 2016-17. So, for the year 2017-18, if you are above 65 years of age and earn above £28,000, your personal allowance will be reduced by £1 for every £2 you earn above the limit. However, the increase in the personal allowance was a huge relief for majority of the population in UK.

Conclusion:

Income Tax Rates 2017-18:

Main Rates
Basic Rates 20%
Higher Rates 40%
Additional Rate 45%
Savings Rates
Starting Rate for savings 0%
Savings Basic Rate 20%
Savings Higher Rate 40%
Savings Additional Rate 45%
Dividend Rates
Dividend Ordinary Rate - for dividends otherwise taxable at the basic rate 7.5%
Dividend Upper Rate - for dividends otherwise taxable at the higher rate 32.5%
Dividend Additional Rate - for dividends otherwise taxable at the additional rate 38.1%
Default Rates
Default Basic Rate 20%
Default Higher Rate 40%
Default Additional Rate 45%

What are the Income Tax Allowances for the year 2017-18?

Tax Year 2017-18 Tax Year 2016-17
Personal Allowance:
Personal Allowance £11,500 £11,000
Income limit for personal allowance £100,000 £100,000
Income limit for married couple’s allowance £28,000 £27,700
Marriage Allowance:
Marriage allowance £1,150 £1,100
Married couple’s allowance for those born before 6 April 1935:
Maximum amount of married couple’s allowance £8,445 £8,355
Minimum amount of married couple’s allowance £3,260 £3,220
Blind Person’s Allowance:
Blind person’s allowance £2,320 £2,290
Dividend allowance:
Dividend allowance £5,000 £5,000
Personal savings allowance:
Personal savings allowance for basic rate taxpayers £1,000 £1,000
Personal savings allowance for higher rate taxpayers £500 £500

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