The New Personal Savings Allowance

The government is set to introduce a new personal savings allowance from 6th April 2016.

The allowance will enable basic rate taxpayers to receive up to £1,000 of savings income tax-free, whilst 40% taxpayers will be able to receive up to £500, resulting in a tax saving of up to £200 per year.

Because so many people will no longer pay tax on their savings, the automatic deduction of tax by banks and building societies will no longer be necessary.

Please note that the savings allowance will not be available to additional rate taxpayers, i.e. those with taxable income in excess of £150,000 per year.

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Personal Allowance Increase

The Personal Allowance is to be increased once again for the 2016-17 tax year.

This is currently set at £10,600 per annum, however, it’s due to increase by a further £400, to £11,000, edging it closer to the Government’s current target of £12,500.

This will mean that taxpayers may be able to earn an additional £400 tax free, which could save basic rate tax-payers as much as £80 per year in tax.

Income Structure 2015-16

If you are a Director and majority shareholder of your own company, you get the privilege of deciding how much to pay yourself as salary!

But before you go taking every penny you can carry, remember that as long as the company is making a profit, you can also vote dividends, which can be far more tax efficient.

So how much do you pay yourself?

Well if you were born after 5th April 1948, your personal allowance (the amount you can earn free of tax) for 2015/16 should be £10,600, and providing you have no other income, that could be the optimal amount to pay yourself.

Assuming that you have no other taxable income, there will be no tax to pay on this level of salary, although there will be some liability for both Employee’s and Employer’s National Insurance.

However, the company should be entitled to an Employment Allowance of £2,000 for 2015/16 to offset against any Employer’s NI liability, on both your own, and any employees’ salaries.

Please remember that as individual circumstances differ, it is always worth seeking professional advice to determine the most tax efficient remuneration method for you

2015/16 Tax Rates

With the 2014/15 tax year coming to a close, here are a few of the most common tax rates and allowances for the new tax year starting on 6th April:

  • Personal Allowance for people born after 5 April 1948 – £10,600

         (Amount you can earn tax-free)

  • Basic Rate (20%) – £0 – £31,785

          (So you can earn £42,385 (including the tax-free £10,600) before paying tax at 40%)

  • Higher rate (40%) – £31,785 – £150,000
  • Additional rate (45%) – Over £150,000

For more detailed information, please see the HMRC website