Taxes, personal allowances and limits - what you'll pay in 2017/18
The personal allowance, or the amount you can earn tax-free before you start paying income tax, will rise by £500 to £11,500. Pensioners won’t receive a higher personal allowance than other age groups.
You will pay basic rate tax (20%) on the first £33,500 of taxable income above your personal allowance. This means you can earn up to £45,000 before you start paying higher rate tax (40%).
The government has said it will increase the personal allowance to £12,500 and the higher rate threshold to £50,000 by the end of this parliament. (Theoretically this will be 2020 but there’s always the potential for an earlier election.)
If you earn £100,000 or more, your tax-free personal allowance falls by £1 for every £2 you earn over £100,000. So if you earn £121,200 or more, you won’t receive a tax-free personal allowance at all.
The additional rate income tax (45%) is also charged on earnings over £150,000.
Rent-a-room tax allowance
Homeowners can get £7,500 tax-free rental income from lodgers, or £3,750 each if you are letting with someone else.
You don’t need to own your own home to participate, tenants can rent out rooms too so long as it is permitted by their rental lease.
Property and trading income tax allowance
For the first time ‘micro-entrepreneurs’ can earn up to £1,000 of income tax free from both property and trading, (for example selling goods on Ebay or Etsy). This measure was announced in the Spring 2016 Budget and comes into force on April 6th 2017.
The personal savings allowance
You might be able to reduce your tax bill further if you receive income from savings.
Following the introduction of the new personal savings allowance in April 2016, basic rate taxpayers can now earn £1,000 from savings before they have to start paying income tax on savings income.
Higher rate taxpayers will only start paying tax on savings income over £500. These allowances remain unchanged in 2017.
There is no savings allowance for additional rate taxpayers. See Tax-free savings are changing for more on how the new personal savings allowance works.
With the highest paying savings account - a five-year bond from Ikano Bank paying 2.35% interest - a basic rate taxpayer would need a balance of around £42,553 before they started paying tax under the rules.
Higher rate taxpayers would need around £21,277 before they start paying tax on savings income.
Looking for a new savings account? Check out our weekly roundup of the best deals. It’s worth checking current accounts too, as some, such as TSB, pay 3% interest on in-credit cash. See our weekly roundup of the top current accounts.
Personal allowances can be stacked, so if you only receive an income from savings, you can earn £12,500 a year (that’s the £11,500 personal allowance, plus the £1,000 savings income) before you start paying tax.
National Insurance – employees
While most people won’t pay income tax on the first £11,500 they earn, employees will need to pay National Insurance once they are earning £155 a week.
This is payable at a rate of 12% for earnings between £155 and £827 a week (£672 to £3,583 a month). This falls to 2% for earnings in excess of this threshold.
National Insurance – self-employed workers
Self-employed workers who make more than £5,965 a year need to pay Class 2 National Insurance contributions. These are a flat rate of £2.80 per week (£146 a year), regardless of how much you earn. If you earn less than this you can make voluntary contributions. This could be necessary if you have gaps in your national insurance record – currently you need 35 years of national insurance contributions to get the maximum state pension.
Class 2 contributions will however be scrapped from April 2018. See Budget 2016: Class 2 national insurance contributions to be scrapped for self-employed workers.
Additionally, self-employed workers who make more than £8,060 a year, will pay Class 4 contributions, of 9% of profits up to £43,000 per year, plus 2% of any earnings above that.
Currently the first £5,000 income from dividends is paid tax-free. Again, this can be stacked with your personal allowance, so if you don’t have other income you’ll be able to earn £16,500 tax-free.
Once you have breached the allowance, basic rate taxpayers will pay 7.5% tax on dividends and higher rate taxpayers will pay 32.5%. Additional rate taxpayers will be charged 38.1% tax on dividend income.
These changes don’t affect any shares you hold in an Isa or a pension. It’s thought those most likely to be affected are small business owners who pay themselves a share of their company’s profits in lieu of a salary.
Capital Gains Taxes
Lower rate taxpayers pay 10% tax on capital gains and higher and additional rate taxpayers pay 20%.
The only exception is people selling second properties, including buy-to-let investments.
Capital gains on these investments will still be charged at 18% for basic rate taxpayers, or 28% for higher and additional rate taxpayers.
There have been no major changes to pension allowances this tax year, so most people will be allowed to pay up to £40,000 into their pension this year.
For now, pensions contributions receive full income tax relief, this means it only costs basic rate taxpayers £80 to save £100 (20% tax relief) while higher rate taxpayers only need to pay £60 to save £100 (40% tax relief).
If you earn more than £150,000, you will not be able to save as much into a pension. The amount you can save falls by £1 for every £2 you earn over £150,000, up to £210,000.
If you earn more than that, you’ll be able to save £10,000 per year. See Higher earners face new pensions tax charge for more on this.
If you have already taken advantage of the pension freedoms and dipped into your pension already, there is a reduced annual allowance (the money purchase annual allowance). In April 2017 this was reduced from £10,000 to £4,000 a year.
The lifetime pensions allowance remains at £1 million.
The amounts you are able to save tax free has increased considerably this year. From April 2017, adults can save £20,000 into an Isa, up from £15,240. The maximum that can be saved tax-free in a Junior Isa has increased from £4,080 to £4,128 a year.
Children with a Child Trust Fund can also save up to £4,128 in the current tax year, or if they’d prefer to, transfer their savings to a Junior Isa.
See our weekly updated top cash Isa rates
Available from 1 November 2011, the Junior ISA will replace child trust funds (CFTs), which have been phased out. Junior ISAs will have a £3,000 limit and will be offered by high street banks, building societies and other providers that currently offer ISAs to adults. You can invest in either stocks and shares or cash. But, unlike CTFs, there will be no government contributions into each child’s savings pot. Money invested in Junior ISAs will be “locked in” until the child is 18, and the ISA will default to an adult one.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.