Tax Free Allowances 2014

This article reviews your tax free allowances for 2014

Overview

Probably one of the most confusing aspects of completing tax forms, is understanding what you are entitled to claim legitimately as a 'tax free' allowance or relief. It is worth taking a few minutes extra to check your incomings and outgoings, to ensure that you are not paying more tax than is necessary. Of course, if you have a good accountant or use a good umbrella company, they should point you in the right direction. Remember though, regardless of who completes the work, it is your responsibility to ensure that you are paying the right amount of tax, at the right time.

Set out below is a brief explanation of various allowances that may apply to you.

Personal Allowance

Most people who reside in the UK are entitled to an 'Income Tax Personal Allowance', which is the total annual amount of 'tax free' money you can receive (earnings, pensions, assets, etc). The allowance is based on both age and income. If you pay tax via employment or your pension, or complete a Self-Assessment tax return, you will receive your Personal Allowance automatically. If you are not receiving it or think it's wrong, you should contact HM Revenue & Customs (HMRC). Note: You cannot claim this allowance if you are a non-UK resident, claiming the special 'remittance' basis of tax i.e. you only pay tax on income you bring into the UK. Allowances for 2014/15

Born before 6 April 1938? Your personal allowance is £10,660, providing that your total income does not exceed £27,000

Born between 6 April 1938 and 5 April 1948? Your personal allowance is £10,500, providing that your total income does not exceed £27,000

Born before 6 April 1948, with an income between £27,000 and £100,000? Significantly more confusing to work out! You have to conduct a calculation to reach an 'adjusted net income' (see below).

Adjusted Net Income calculation: Net income - gift aid & pension contributions + tax relief payments

If the result of the equation is more than £27,000 but not more than £100,000, your Personal Allowance is reduced by half of the remaining amount. i.e. anything over £27K is halved and deducted from you're allowance.

Example:

If you earn £28,000, you would exceed the personal allowance limit by £1,000. The £1000 will be halved, then taken away from your personal allowance. This means that your personal allowance reduces from £10,500 to £10,000

£28,000 - £27,000 = £1000 over limit

£1000 ÷ 2 = £500 to be deducted from your £10,500 personal allowance

£10,500 - £500 = £10,000 personal allowance.

Born after 5 April 1948? Your personal allowance is £10,000, providing your total income does not exceed £100,000

Income above £100,000? If your 'adjusted net income' exceeds £100,000, your Personal Allowance is reduced by half of the amount for any money over £100k, regardless of age. In some instances your Personal Allowance will be reduced to nil.

Example

Peter was born after 5th April 1948 and so has a personal allowance of £10,000. His earnings are £120,000.

£120,000 - £100,000 = £20,000 over limit

£20,000 ÷ 2 = £10,000 to be deducted from your personal allowance

£10,000 - £10,000 = 0 Peter does not have a personal allowance this year

Blind Person's Allowance

The Blind Person's Allowance is in addition to the tax-free Personal Allowance and is £2,230. Dependent on your circumstances, you may be able to transfer your Blind Person's Allowance to your spouse or civil partner. You must be registered as blind or severely sight impaired. For Scotland or Northern Ireland residents, if you are unable to perform any work for which eyesight is essential, you can also claim the allowance.

For more information or to make a claim, you can contact the HMRC priority line 0300 200 3301

At the end of the tax year, you can request that HMRC transfer any unused allowance to your spouse or civil partner if your tax bill isn't high enough to use up all of your Blind Person's Allowance, or if you don't pay tax. Either contact them on the number above, or complete a 575 form 'Notice of transfer of surplus Income Tax allowances'.

Married Couple's Allowance

The Married Couple's Allowance is applicable to tax payers who are living together, who were born before 6 April 1935 and it is taken off your tax bill. At the end of the tax year, if you don't pay tax, (or if your tax bill isn't high enough to use up all of your allowance), but your spouse or civil partner does, you can request that HMRC transfer any unused Married Couple's Allowance to them, by completing a 575 form 'Notice of transfer of surplus Income Tax allowances' or telephoning them. If you wish to share the minimum Married Couple's Allowance or want to transfer the whole of it to your spouse/civil partner, complete form 18 'Transferring the Married Couple's Allowance', before the start of the tax year.

If you divorce/separate or one of you dies, you will continue to receive the allowance for the full tax year. If you marry mid-way through a tax year, your allowance will be calculated as a percentage of that year. E.g. If you marry in September, you will receive 7/12ths of the full year entitlement. (September - March). To claim the allowance, telephone or write to HMRC.

Married before 5 December 2005 and living together?

Providing at least one person was born before 6 April 1935, the husband can claim. Your tax bill is reduced by 10% of the Married Couple's Allowance to which you are entitled.

Married on or after 5 December 2005 or a civil partnership and living together?

Providing at least one person was born before 6 April 1935, the person with the higher income can claim. Your tax bill is reduced by 10% of the Married Couple's Allowance to which you are entitled.

Unable to live together?

If you are separated through illness/ old age necessitating in residential care, or working away from home/completing training/education/forces posting, or custodial sentence, you will still be able to claim the allowance.

Calculating the Married Couple's Allowance

For the 2014/15 tax year, the minimum amount is £3,140 and the maximum £8,165. 10% of the allowance is realised as a tax reduction (between £314 and £816.50).

HMRC begin by giving you the maximum allowance of £8,165. If your earnings are £27,000 or less, you will receive the full £816.50 tax reduction (10% of £8,165).

Now things may get complicated! If your income is over £27,000, a deduction to your allowance of £1 for every £2 that is over your income allowance of £27,000 is applied, (same as with the personal allowance). They will do this until the 'basic' level of personal allowance is reached (£10,000). If you are still over the limit, they will then start reducing your Married Couple's Allowance, until reaching the minimum £3,140. You will then get the tax reduction of £314 (10% of £3,140). You will always receive at least the minimum tax reduction.

Example

Fred was born in 1933 and entitled to the Married Couple's Allowance. He has an income (before allowances) of £32,000.

HMRC subtracts the £27,000 income limit from Freds £32,000 income. Fred is £5,000 over the limit. HMRC take half of this (£2,500) from Freds total allowances. This is taken off his allowances, until the minimum Married Couple's Allowance is reached.

£32,000 (Income) - £27,000 (income allowance limit) = £5,000 over limit

£5,000 ÷ 2 = £2,500 (to be deducted from personal allowance and Married Couples allowance)

£2,500 - £660 = £1840 (Personal allowance of £10,660 is reduced by £660 to the basic allowance of £10,000)

£8,165 (married couples allowance) - £1840 = £6,325 Married Couples Allowance new calculation

£6,325 ÷ 10% = £632.50 tax reduction

Maintenance Payments relief

If you or your current Partner (spouse/civil partner) were born before 6 April 1935 and you are separated/divorced/civil partnership dissolved, paying maintenance to your ex-partner (provided they aren't remarried/in civil partnership), or for your children who are under 21, or if you're making payments through a court order, you can get an allowance to reduce your tax bill for the maintenance payments. You cannot claim a tax reduction for voluntary payments.

The recipient of maintenance payments is not taxed on that money.

The Maintenance Payments Relief for the 2014/15 tax year is 10% of £3140 (£314) or less. If your maintenance payments are less than £3,140 a year, your allowance will be 10% of what you have actually paid. The payment relief is taken from your tax bill. Please contact HMRC if you believe that you are entitled to receive Maintenance Payments Relief.

Example

Charles is divorced and has a total income of £25,000 per annum. He pays his ex-partner maintenance of £1800 a year (£150 per month). He pays 20% on any income above his personal allowance of £10,660 (as he was born before 6th April 1938).

£25,000 (income) - £10.660 (personal allowance) = £14,340 (taxable income)

£14,340 ÷ 20% (tax rate) = £2868 (tax bill)

£2868 (tax bill) - £1800 (maintenance payments relief) = £1068 (new tax bill)

This article has concentrated on the 'personal' aspect of allowances. There are several savings to be made on some expenses incurred, please check out other articles within iCalculator to see what you may be able to claim. Happy saving!!