Changes to Personal Tax – how this affects your personal allowance and tax rates

Budget 2017 Summary - Personal Tax

Our series of blog posts will take you through the main areas of the Spring Budget 2017 to help you decipher what was said and understand how it might affect you. The first two blogs in our series look at changes made to Personal Tax, below we look at personal allowance, tax bands and rates, and dividends.

For some free and impartial advice download our Spring Budget 2017 Summary for a complete look at the details of the Budget. Our full summary focuses on the issues likely to affect you, your family and your business.

 

The personal allowance

The personal allowance is currently £11,000. Legislation has already been enacted to increase the allowance to £11,500 for 2017/18.

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A reminder that not everyone has the benefit of the full personal allowance. There is a reduction

in the personal allowance for those with ‘adjusted net income’ over £100,000, which is £1 for every £2 of income above £100,000. So, for 2016/17 there is no personal allowance where adjusted net income exceeds £122,000. For 2017/18 there will be no personal allowance available where adjusted net income exceeds £123,000.

 

Tax bands and rates

The basic rate of tax is currently 20%. The band of income taxable at this rate is £32,000 so that the threshold at which the 40% band applies is £43,000 for those who are entitled to the full personal allowance.

In 2017/18 the band of income taxable at the basic rate will be different for taxpayers who are resident in Scotland to residents elsewhere in the UK. The Scottish government has decided to reduce the band of income taxable at the basic rate to £31,500 so that the threshold at which the 40% band applies remains at £43,000.

In the rest of the UK, legislation has already been enacted to increase the basic rate band to £33,500 for 2017/18. The higher rate threshold will, therefore, rise to £45,000 in 2017/18.

The additional rate of tax of 45% remains payable on taxable income above £150,000 for all UK residents.

Find out more about how Baker Watkin can help you with your Personal Tax.

 

Tax bands and rates – dividends

Dividends received by an individual are subject to special tax rates. The first £5,000 of dividends are charged to tax at 0% (the Dividend Allowance). Dividends received above the allowance are taxed at the following rates:

  • 7.5% for basic rate taxpayers
  • 32.5% for higher rate taxpayers
  • 38.1% for additional rate taxpayers.

Dividends within the allowance still count towards an individual’s basic or higher rate band and so may affect the rate of tax paid on dividends above the £5,000 allowance.

To determine which tax band dividends fall into, dividends are treated as the last type of income to be taxed.

 

Reduction in the Dividend Allowance

The Dividend Allowance will be reduced from £5,000 to £2,000 from April 2018.

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The government expect that even with the reduction in the Dividend Allowance to £2,000, 80% of ‘general investors’ will pay no tax on their dividend income. However, the reduction in the allowance will affect family company shareholders who take dividends in excess of the £2,000 limit. The cost of the restriction in the allowance for basic rate taxpayers will be £225 increasing to £975 for higher rate taxpayers and £1,143 for additional rate taxpayers.

 

In our next blog, we look at the below areas of Personal Tax:

  • Tax on savings income,
  • ISA’s
  • Money Purchase Annual Allowance (MPAA’s)
  • Tax-free childcare
  • Universal credit
  • Property and trading allowances

 

If you would like to discuss any of the Personal Tax issues raised in this blog and how they might affect you then get in touch

call 01438 750555 or email enquiries@bakerwatkin.co.uk

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