Introduction to Income Tax Allowances
Income tax allowances represent specific amounts of money that can be deducted from a taxpayer’s gross income to reduce their taxable income and ultimately decrease the amount of income tax owed. These allowances are available for various categories of taxpayers, such as individuals, married couples, blind persons, and those with specific types of income like savings or dividends.
Key Allowances
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Personal Allowance: Every UK resident is entitled to a personal allowance. This is a set amount deducted from an individual’s gross income. Any income above this threshold is subject to income tax.
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Married Couple’s Allowance: This is available to couples where one spouse was born before 6 April 1935. This allowance can provide tax relief up to a maximum of £8439 (for the year 2016-17), available at a 10% tax relief rate.
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Blind Person’s Allowance: This provides an additional allowance of £2290 for registered blind persons.
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Savings Income Allowance: There is an allowance of £1000 for savings income, which is lowered to £500 for higher-rate taxpayers.
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Dividend Tax Allowance: For dividend income, there is an allowance of £5000.
Examples
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Personal Allowance Example:
- If a taxpayer earns £20,000 and the personal allowance is £12,570, only £7,430 is taxable income.
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Married Couple Example:
- If one spouse was born before 6 April 1935 and their income is £30,000, they can claim up to £8439 as a married couple’s allowance, receiving 10% relief on this amount.
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Savings Income Example:
- If a higher-rate taxpayer has savings income of £2000, they can deduct £500 as a savings income allowance.
Frequently Asked Questions (FAQs)
Q1: What happens to the personal allowance if my income exceeds a certain level?
- A: For individuals with an income over £100,000, the personal allowance is reduced by £1 for every £2 of income above £100,000.
Q2: Can both partners in a married couple transfer their personal allowance?
- A: No, only one spouse in the marriage can transfer up to 10% of their personal allowance to their partner, and only if neither is a higher-rate taxpayer.
Q3: Is the dividend tax allowance available to everyone?
- A: Yes, the dividend tax allowance of £5000 is available to all taxpayers, regardless of whether they are basic, higher, or additional rate payers.
Q4: How is the registered blind person’s allowance claimed?
- A: This allowance must be claimed by registered blind persons through their annual tax return or by contacting HMRC directly.
Q5: Are there other allowances available for specific circumstances?
- A: Yes, other allowances may be available depending on individual circumstances, such as allowances for dependents, specific employment expenses, and charitable donations.
Related Terms
- Gross Income: Total income earned by an individual before any tax is deducted.
- Taxable Income: Income amount on which tax is computed, after all deductions, including allowances.
- HMRC (Her Majesty’s Revenue and Customs): The UK government department responsible for the collection of taxes.
Online Resources
- HMRC Personal Allowances Overview
- HMRC Guide to Married Couple’s Allowance
- Which? Guide to Dividend and Savings Income
Suggested Books for Further Studies
- “Tolley’s Income Tax 2021-22” by David Smailes
- “Taxation: Finance Act 2020” by Alan Melville
- “Bloomsbury’s Tax Rates and Tables 2021/22”
Accounting Basics: “Income Tax Allowances” Fundamentals Quiz
Thank you for delving into the intricate aspects of income tax allowances. By mastering these concepts, you are fortifying your financial acumen and expanding your strategic tax planning toolkit!
