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.
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.
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 for those entitled to the full personal allowance.
The additional rate of tax of 45% remains payable on taxable income above £150,000.
The Scottish government are expected to confirm the basic rate band, personal allowance, etc which will apply to Scottish taxpayers in the Scottish Budget on 15 December 2016. The Scottish government have pledged to 'freeze' the current higher rate threshold in 2017/18, increasing it by no more than inflation until 2021/22.
Long term commitments to raise the personal allowance and higher rate threshold
The Chancellor has reaffirmed the government's objectives to raise the personal allowance to £12,500 and the higher rate threshold to £50,000 by the end of this Parliament. He also announced that once the personal allowance reaches £12,500, it will then rise in line with CPI as the higher rate threshold does, rather than in line with the National Minimum Wage.
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.
Many individuals do not have £5,000 of dividend income and so their dividend income is tax free irrespective of the tax rates payable on other income.
Individuals who regard themselves as basic rate taxpayers need to appreciate that all dividends received still form part of the total income of an individual. If dividends above £5,000 are received, the first £5,000 will use up some or all of the basic rate band available. The element of dividends above £5,000 which are taxable may well therefore make the individual a higher rate taxpayer with the dividends being taxed at 32.5%.
Tax on savings income
Savings income is income such as bank and building society interest. Some individuals qualify for a 0% starting rate of tax on savings income up to £5,000. However, the rate is not available if taxable non-savings income (broadly earnings, pensions, trading profits and property income) exceeds the starting rate limit.
In addition, from 2016/17 the Savings Allowance (SA) applies to savings income. Income within the SA is taxed at 0% (the 'savings nil rate'). However, the available SA in a tax year will depend on the individual's marginal rate of income tax. Individuals taxed at up to the basic rate of tax will have an SA of £1,000. For higher rate taxpayers, the SA is £500 whilst no SA is due to additional rate taxpayers.
Individual Savings Accounts (ISAs)
The overall ISA savings limit is £15,240 for 2016/17 but will jump to £20,000 in 2017/18.
A new Lifetime ISA will be available from April 2017 for adults under the age of 40. Individuals will be able to contribute up to £4,000 per year and receive a 25% bonus from the government. Funds, including the government bonus, can be used to buy a first home at any time from 12 months after opening the account, and can be withdrawn from age 60 completely tax-free.
The increase in the overall ISA limit to £20,000 for 2017/18 is partly due to the introduction of the Lifetime ISA. There will therefore be four types of ISAs for many adults from April 2017 - cash ISAs, stocks and shares ISAs, innovative ISAs (allowing investment into peer to peer loans) and the Lifetime ISA. Money can be placed into one of each kind of ISA each tax year.
Money Purchase Annual Allowance
The Money Purchase Annual Allowance will be reduced from £10,000 to £4,000 from April 2017.
The 'annual allowance' sets the maximum amount of tax efficient pension contributions. The normal annual allowance is £40,000. The Money Purchase Annual Allowance was introduced in 2015, to restrict the annual allowance to £10,000 when an individual over 55 has taken income from a pension scheme. The government will consult on the detail of the further restriction now announced.
The tax treatment of foreign pensions will be more closely aligned with the UK's domestic pension tax regime by bringing foreign pensions and lump sums fully into tax for UK residents, to the same extent as domestic ones.
Universal Credit is the new state benefit designed to support those on low income or out of work.
An individual's entitlement to the benefit is made up of a number of elements to reflect their personal circumstances. Their entitlement is tapered at a rate of 65% where claimants earn above the work allowances. The current taper rate for those who claim Universal Credit means their credit will be withdrawn at a rate of 65 pence for every extra £1 earned.
From April 2017, the taper rate that applies to Universal Credit will be reduced from 65% to 63%.
The Chancellor stated this will let individuals keep more of what they earn and strengthen the incentive for individuals to progress in work. The government estimates that three million households will benefit from this change.