Personal Income Tax
Tax rates and allowances (Table A)
As announced in the Autumn Statement, the standard personal allowance will increase in April 2015 by £600, to £10,600 in 2015/16. For a basic rate taxpayer, this represents a tax reduction of £120 for the year.
The band of income charged to the basic 20% rate narrows by £80 to £31,785 (from £31,865) – however, as the increase in the allowance is larger, the level of income at which 40% tax starts has gone up from £41,865 to £42,385. This means that the maximum benefit for someone earning up to £100,000pa is £224 – in recent years the threshold has been set at lower and lower levels to restrict the benefit of allowance increases to the same amount as that enjoyed by a basic rate taxpayer.
The personal allowance continues to be withdrawn for those with incomes above £100,000, producing a marginal tax rate of 60% in the band between £100,000 and £121,200. For those who have no personal allowances (incomes above £121,200), the reduction in the basic rate band represents a small tax increase of £32.
Transferable allowances and starting rate
For the first time in 2015/16, married couples or registered civil partners will be allowed to transfer up to £1,060 (one-tenth) of their personal allowances to their spouse or partner, if the transferee only pays basic rate tax. This enables such a couple to save up to £212, if one partner is not able to use the full allowance. This relief is not available to those who can claim the Married Couple’s Allowance (where one partner was born before 6 April 1935).
Also for the first time in 2015/16, the 'starting rate' is reduced from 10% to 0%, and the starting rate band is increased from £2,880 to £5,000. This only applies to people whose personal allowances cover all or most of any income that is not taxed at the savings or dividend rate – if, for example, salary or rent is greater than £10,600 + £5,000, the starting rate does not apply. Many pensioners will be entitled to register to receive their interest income gross.
Future allowances and rates
The personal allowance will rise to £10,800 for 2016/17 and £11,000 for 2017/18. The basic annual increase is linked to inflation, but each year of the present government has seen much larger rises – these £200 increases represent 1.9%pa, with no mention of any additional adjustment for inflation.
The higher allowances for those born before April 1938 cease to exist in 2016/17, because the standard personal allowance will be higher than the £10,660 level at which it has been fixed since 2012/13. There will therefore no longer be any restriction on personal allowances for such people until their income reaches £100,000 (in 2015/16, there is a small restriction if income exceeds £27,700).
The basic rate band will be increased to £31,900 for 2016/17 and £32,300 for 2017/18. These are the first increases in the band since 2009/10.
From 6 April 2016, savings income (such as bank or building society interest) of up to £1,000pa will not be taxable for a basic rate taxpayer, saving up to £200. A 40% taxpayer will enjoy the same benefit on an allowance of £500. An additional rate taxpayer (income over £150,000) will not benefit from this allowance.
It is estimated that this will mean that 95% of taxpayers will not have any tax to pay on this type of income. Banks and building societies will therefore no longer deduct tax from interest payments. This will represent a welcome simplification of the tax system.