Tax rates and allowances
Tax-free income and allowances
By Ian Robinson
Article 2 of 8
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.
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|Tax basics explained|
|Basic-rate income tax (20%)||£0-£32,000 (after allowances)||£0-£33,500 (after allowances)|
|Higher-rate income tax (40%)||Over £32,000||Over £33,500|
|Additional rate income tax (45%)||Over £150,000||Over £150,000|
|Personal allowance (tax-free)||£11,000 (unless income above £100,000)||£11,500 (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|
|Married couple’s allowance (MCA) - born before 6 April 1935 only||£8,355||£8,445|
|Blind person's allowance||£2,290||£2,3200|
|Capital gains tax (CGT) threshold||£11,100||£11,300|
|Inheritance tax threshold (IHT)||£325,000||£325,000 + £100,000 if estate includes family home|
Most people are allowed to receive a certain amount of income before tax is payable. This is known as the basic personal allowance.
In 2017-18, the basic personal allowance is £11,500. In 2016-17, it was £11,000.
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.
This means that if you earn £123,000 or more in 2017-18, you receive no personal allowance and all your income is taxed. For 2016-17, this figure was £122,000.
Personal allowances for older people
The personal allowance is now the same for everyone (barring those that earn above £100,000 a year, as described above), irrespective of your date of birth.
In the past, people born before 5 April 1938 were entitled to a higher personal allowance. But it has risen so much in recent years that everyone gets the same £11,500 in the 2017-18 tax year.
Marriage-transferable tax allowance
In 2017-18, married couples born after 1935 are able to transfer £1,150 of unused personal allowance.
If you're set to earn less your personal tax allowance in 2017-18 (£11,500), 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 £10,350 (£11,500-£1,150) can transfer £1,150 allowance to their partner, saving them £230.
Those earning above £10,350 but below £11,500 can still transfer £1,150 of allowance, but will become liable to pay tax on any income in excess of £10,350.
Their partner still makes a tax saving of £230, 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'. This means the tax you pay is reduced by deducting 10% of the allowance from your final tax bill.
The married couple’s allowance for 2017-18 is £8,445. So, if you receive the full married couple's allowance of £8,445, £845 will be taken off your tax bill (£8,455 x 10%).
Income above £28,000
The amount of married couple's allowance you receive may be reduced if your income is more than £28,000.
If your income is above £100,000, your basic personal allowance is reduced first, by £1 for every £2 'excess income', until it falls to £0 at £123,000 of income.
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 £3,260 in 2017-18.
Personal savings allowance and dividends allowance
For savings interest received in 2017-18, the tax-free personal savings allowance allows you 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 2017-18, a 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 2017-18, the maintenance relief allowance is £3,260, so if you are eligible to claim, you'll be able to deduct £326 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 2017-18, this allowance is £2,320 (the same as 2017-18).
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.
- Last updated: April 2017
- Updated by: Gareth Shaw