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Tax Tip 2

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TAX TIP 2

The Starting Rate Band

For this tax year (2015/16) the starting rate band for savings income was widened from £2,880 to £5,000 and the rate reduced from 10% to 0%. Very sadly, this only applies if your earnings and/or pension income are less than £15,600 in this tax year. So it won’t help most. However, if you do qualify, it’s important that you have the right type of investment to pay 0% tax.

If all of your income falls within the personal allowance plus the starting rate band, in 2015/16 you should be able to register to receive interest with no tax deducted at source. From 2016/17 you won’t even need to register as banks and building societies will start paying interest without deducting tax

The Personal Savings Allowance

If you pay tax at no more than the basic rate, the personal savings allowance will mean you can receive savings income of up to £1,000 tax free in 2016/17. If you pay higher rate tax then the allowance is £500. Either way this is a tax saving of £200 a year. Additional Rate tax Payers won’t get an allowance.

With such very low interest rates this probably means most people will have no tax to pay on their bank and building society accounts. To avoid HMRC being flooded with small tax reclaims, all interest will be paid gross from next year.

The combination of personal allowance, personal savings allowance and starting rate band will mean that in 2016/17 it will be possible to have an income of up to £16,800 before paying any tax. However, it has to be the right type of income, so planning is essential

Tax Tip 1 – The Personal Allowance

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March’s budget set the 2015/6 personal allowance at £10,600 and it is due to rise to £10,800 next year and £11,000 in 2017/18. If we believe the Conservative Party election manifesto we could see a Personal Allowance of £12,500 by April 2020.

Even now, many of us don’t use our personal allowances fully and there is still a gap o over £2,500 between it and the starting point for National Insurance contributions.

At the other end of the income scale there are some of us who have no personal allowance this year as our income exceeds the £121,200 threshold at which point the allowance is tapered to nil.

If you or your partner do not use the personal allowance, you could end up paying more tax than necessary. There are several ways to maximise use of your allowances.

• Choose the right investments: some investments do not allow you to reclaim tax paid while others are designed to give capital gain, not income.

• Couple should consider rebalancing investments so that so that each has enough income to cover their personal allowance.

• Make Sure in retirement you and your partner have enough pension income. The basic state pension (£115.95 a week in 2015/16) alone is not enough.

Next… The Starting Rate Tax Band