Tax rates and allowances
Tax-free income and allowances
By Ian Robinson
Article 2 of 7
Tax-free income and allowances
Discover how much you can earn before being taxed, and the different types of allowances and reliefs you may be able to claim.
Tax-free allowances reduce the amount of tax you have to pay on income you receive.
There are two types:
- allowances that give full relief and allow you to earn a certain amount of money before paying tax
- allowances that give restricted relief, which reduce your tax bill by a tenth of their nominal value.
The table below shows the main allowances.
|Tax basics explained|
|Basic-rate income tax (20%)||£0-£31,785 (after allowances)||£0-£32,000 (after allowances)|
|Higher-rate income tax (40%)||Over £31,785||Over £32,000|
|Additional rate income tax (45%)||Over £150,000||Over £150,000|
|Personal allowance (tax-free)||£10,600 (unless income above £100,000)||£11,000 (unless income above £100,000)|
|Income limit above which you start to lose personal allowance (at rate of £1 for each £2 you earn above limit)||£100,000||£100,000|
|Age-related personal allowance (born before 6 April 1948 )||N/A||N/A|
|Age-related personal allowance (born before 6 April 1938)||£10,660||N/A|
|Lower earnings limit (above which you start to lose age-related allowance)||£27,700||N/A|
|Upper earnings limit (above which you receive no age-related allowance, just basic personal allowance)||£27,820||N/A|
|77+ Upper earnings limit (above which you receive no age-related allowance, just basic personal allowance)||£27,820||N/A|
|Married couple’s allowance (MCA) - born after 6 April 1935||N/A||N/A|
|Married couple’s allowance (MCA) - born before 6 April 1935 only||£8,355||£8,355|
|Blind person's allowance||£2,290||£2,290|
|Capital gains tax (CGT) threshold||£11,100||£11,100|
|Inheritance tax threshold (IHT)||£325,000||£325,000|
Most people are allowed to receive a certain amount of income before tax is payable. This is known as the basic personal allowance. In 2016-17, the basic personal allowance is £11,000. In 2015-16, it was £10,600. If you earn above £100,000, it is progressively withdrawn, at the rate of £1 for every £2 above £100,000 you earn. This means that if you earn £122,000 or more (2016-17), you receive no personal allowance and all your income is taxed. For 2015-16, this figure was £121,200.
Budget update: In the 2016 Budget, it was announced that the personal allowance would rise to £11,500 in 2017-18.
Income above £100,000
If your income is above £100,000, basic personal allowance is reduced by £1 for each £2 earned over the £100,000 limit, irrespective of age.
Personal allowances for older people
From April 2016, people born before 6 April 1938 no longer qualify for a higher amount of tax relief. For income received between April 2015 and April 2016, age-related personal allowance may apply. Depending on income, this could have meant a personal allowance of £10,660 in 2015-16. For 2016-17, the standard allowance is £11,000, irrespective of your date of birth.
You are only entitled to the full amount of higher age-related allowance if your income during the 2015-16 tax year was under £27,700, however. If your income was above £27,700, you'll lose the higher allowance at the rate of £1 for every £2 that your income exceeds £27,700. Above £27,280 (2015-16), you lose any higher allowance and get just basic personal allowance.
Marriage-transferable tax allowance
As of April 2016, married couples born after 1935 are able to transfer £1,100 of unused personal allowance.
If you're set to earn less your personal tax allowance in 2016-17 (£11,000), you can transfer unused allowance to your partner so they have less income tax to pay, provided they are a basic-rate taxpayer. Those earning less than £9,900 (£11,000-£1,100) can transfer £1,100 allowance to their partner, saving them £220. Those earning above £9,900 but below £11,000 can still transfer £1,100 of allowance, but will become liable to pay tax on any income in excess of £9,900. Their partner still makes a tax saving of £220, but the extra tax they pay reduces the overall level of saving made by the couple.
Married couple's allowance
You only qualify for this allowance if you or your husband, wife or registered civil partner were born before 6 April 1935.
Unlike the personal allowance, the married couple's allowance is not an amount you can earn before you start paying tax. Instead, it's a restricted relief allowance, which means the tax you pay is reduced by deducting 10% of the allowance from your final tax bill. The married couple’s allowance for 2016-17 is £8,355. So, if you receive the full married couple's allowance of £8,355, £835 will be taken off your tax bill (£8,355 x 10%).
Income above £27,700
The amount of married couple's allowance you receive may be reduced if your income is more than £27,700. If your income is above this limit, age-related personal allowance is reduced first, by £1 for every £2 'excess income', until it falls to the basic personal allowance of £10,600. If your income is above £100,000, your basic personal allowance is then reduced at the same rate. After this, you lose married couple's allowance at a rate of £1 for each remaining £2 of 'excess income', until you reach minimum married couple's allowance of £3,220 in 2016-17.
Personal savings allowance and dividends allowance
For interest received in 2016-17, a new personal savings allowance applies, where the first £1,000 is tax-free if you are a basic-rate taxpayer (£500 if you're a higher-rate taxpayer). For dividend income received from investments in 2016-17, a new dividends allowance applies. The first £5,000 is tax-free.
Claiming maintenance relief
You can claim this relief for certain maintenance payments you make if you or your ex-spouse or registered civil partner were born before 6 April 1935 and you pay the maintenance under a legally binding agreement. It works in a similar way to the married couple's allowance: your tax bill will be reduced by 10% of the maintenance relief allowance or the amount you pay in maintenance, if that amount is lower. In 2016-17, the maintenance relief allowance is £3,220, so if you are eligible to claim, you'll be able to deduct £322 or 10% of the amount you pay in maintenance, if that's lower.
Blind person's allowance
You may also be entitled to an additional allowance if you or your spouse or registered civil partner are blind or have severely impaired sight.
This is another full-relief allowance, as it is treated in the same way as the personal allowance, so increases the amount of income you can receive before you start to pay tax. In 2016-17, this allowance is £2,290 (the same as 2015-16).
In England and Wales
If you live in England or Wales, you will need to be certified as blind and appear on a local authority register of blind people to claim this allowance.
In Scotland and Northern Ireland
If you have not been certified as blind and live in Scotland or Northern Ireland, you will qualify for the allowance if your eyesight is so bad that you are unable to perform any work where your eyesight is essential.
If your income is not enough to make use of the allowance, any unused balance can be transferred to your spouse or registered civil partner.