Taxes, personal allowances and limits - what you'll pay in 2016/17
The personal allowance, or the amount you can earn tax-free before you start paying income tax, will rise by £400 to £11,000. For the first time, pensioners won’t receive a higher personal allowance than other age groups.
You will pay basic rate tax (20%) on the first £32,000 of taxable income above your personal allowance. This means you can earn up to £43,000 before you start paying higher rate tax (40%).
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 it 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.
If you’ve heard talk of new allowances for property income, or from selling things online, these are on the way but won’t arrive until April 2017.
New savings allowance
You might be able to reduce your tax bill further if you receive income from savings.
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.
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 savings rates so poor at present, the government forecasts that 95% of people will not pay tax on savings income after these changes are introduced.
With the highest paying savings account, for example, - a five-year bond from Union Bank of India paying 3% interest - lower rate taxpayer would need more than £33,300 before they start paying tax under the new rules.
Higher rate taxpayers would need around £17,000 before they start paying tax on savings income.
Looking for a new savings account? Check our weekly roundup of the best deals. It’s worth checking current accounts too, as some, such as TSB, pay 5% 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 £12,000 a year (that’s the £11,000 personal allowance, plus the £1,000 savings income) before you start paying tax.
National Insurance – employees
While most people won’t pay tax on the first £11,000 they earn, employees will need to pay National Insurance if they earn more than £5,824 a year.
Workers will pay 12% National Insurance on earnings up to £43,000, and 2% on earnings over that.
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.
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.
Taxes on dividends have changed. The first £5,000 income from dividends will now be 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 £16,000 tax-free.
After that, 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
Capital Gains Taxes have been cut in most cases. Lower rate taxpayers will pay 10% (previously 18%) and higher and additional rate taxpayers will pay 20%, down from 28%.
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.
The annual allowance has not changed, so you can still make £11,100 before you start paying capital gains tax.
There have been no major changes to pension allowances this year, so most people will be allowed to put up to £40,000 into a pension before 5 April 2017.
For now, pensions contributions receive full income tax relief, meaning basic rate taxpayers get £20 tax relief for every £80 they save. The system is even more generous for higher rate taxpayers, who get £40 for every £60 they save.
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.
Adults can save £15,240 into an Isa this year, the same as 2015/16. People with Junior Isas can save £4,080, which is also unchanged.
Children with a Child Trust Fund can also save up to £4,080 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.