Know Your Tax Free Allowances for 2017/18

Mostly everyone residing in the UK is aware that they have a tax-free personal allowance of £11,500 in the tax year 6th April 2017-5th April 2018. But there are many other allowances which are available for use and if used correctly, can reduce the tax liability significantly.

Starting Rate for Savings

This relief is aimed at individuals with modest earnings and for whom income from interest on their savings matters. Under this measure up to £5,000 of the interest income can be claimed tax-free over and above the standard Personal Allowance of £11,500. However, the exemption is dependent upon your income from other sources. If you are earning from other sources like salary, pensions, rental and other similar income is equal to or just little more than your personal allowance of £11,500 and you are lucky enough to have savings income of £5000 from bank or building society interest; this generous allowance can be fully exploited. In other words, if you earn £16,500 or more from your other income, this is not for you.

Personal Savings Allowance

This provision allows you up to £1,000 in savings income tax-free provided you are a basic rate tax payer. This is in addition to the relief provided under starting rate saving. The main difference between these two is the nature of dependency on the other income. Personal savings allowance is dependent only on your income tax slab, while starting rate for savings is contingent on the income itself. Interest income generated from bank savings and similar sources of interest are eligible for this allowance. The benefits are extended to interest from government and commercial bonds and similar instruments. Allowance for the higher rate is £500 of savings income while additional rate is not entitled under this scheme.

Dividend Allowance

Dividend allowance is similar to personal saving allowance but applicable to the income earned from dividends. This was introduced along side the new dividend tax rates unveiled in April 2016. Unlike personal saving allowance, allowance on dividends is neither dependent on absolute income nor on income band. You can have £5,000 of tax-free dividend income, maximum under this provision, even if you are higher rate or additional rate tax payer. However, the relief is short-lived and is set to be significantly lowered to £2,000 for 2018/19 as announced in the 2017 Spring Budget.

Rent-a-Room Relief

From April 2016, tax-free income that can be received from renting out a room or rooms in an individual's only or main residential property has been raised from £4,250 to £7,500 per year. If your gross receipt is less than £7,500, you may ignore it completely. The benefit is extended to guest house, bed and breakfast or similar, providing that it is your main residence. For jointly owned properties, husband and wife can claim equal benefit of £3,750 each. The income exceeding the limit would be treated as normal income and would be liable for income tax.Those with substantial income and expenses or expecting losses may choose to ignore the relief completely and use the traditional method of accounting.

Trading Income Allowance

Small earning up to £1,000 from casual income including trading or professional activities are exempted under this policy. It also covers certain miscellaneous income chargeable under Chapter 8 of Part 5, of the Income Tax Act.Where the individual’s trading or property income is less than the allowance, full relief is given so that the income is not charged to tax, unless the individual elects otherwise.

In a situation where trading income exceeds the allowance limit the individual may elect for the standard method of calculating income i.e. deducting expenses from the receipts and ignoring the relief completely or deducting the £1000 allowance from the receipts and ignore any expenses.

Trading allowance cannot be claimed on the income on which Rent-a-room benefit is already availed.It will also not apply, if the alternative method is not elected, but instead the actual allowable expenses are deducted.

Property Income Allowance

This provision works very similar to Trading Allowance enabling £1,000 of tax-free property income. Both property and trade allowances will apply to all types of property and trading income of an individual but not to partnership income from carrying on a trade, profession or property business in partnership.The election for the trading or property allowance are made independently and apply for each particular tax year. Likewise, Rent-a-room relief cannot be clubbed with this allowance on same income.

Marriage Allowance

Under this provision a husband, wife or a civil partner who is not liable to income tax above basic rate or earning less than Personal Allowance limit (£11,500) can transfer £1,150 (in 2017-18) of his/her allowance to his/her partner who pays base rate tax, in other words to a partner earning between £11,501 and £45,000 (or £43,000 if you're in Scotland). Therefore, reducing their tax liability by up to £230 in a tax year.You can backdate your claim to include any tax year since 5 April 2015 that you were eligible for Marriage Allowance. You are eligible for this allowance even if you receive pension or live abroad while you are eligible for Personal Allowance.

Capital gains tax annual exemption

This often under-utilised exemption allows take home of up to £11,300 (Annual Exempt Amount for 2017/18) of capital gains income free from Capital Gains Tax (CGT). You will only pay CGT if your overall gain after deducting any losses and applying any reliefs is above £11,300. Married couple and civil partner each have their own CGT allowance of £11,300, so gains up to £22,600 on joint investments can be taken tax free in 2017-18.

Blind person's allowance

An addition £2,320 is added to eligible person's yearly Personal Allowance.If you and your spouse or civil partner are both eligible, you'll each get an allowance.

You can transfer your Blind Person's Allowance to your spouse or civil partner if you don't pay tax or don't earn enough to use all of your allowance.

Old married couple's allowance

This is distinct from above-mentioned Marriage Allowance. Under this scheme you can reduce your tax bill between £326 and £844.50 a year if you live with your spouse or civil partner and one of you was born before 6 April 1935. Married Couple's allowance cannot be claimed together with the transferable Marriage Allowance.

Conclusion

The current tax system offers generous allowances and if ones income is organised correctly the tax burden can be reduced significantly.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.