Savings allowance, Marriage allowance, Pensions annual allowance

Last week we reviewed three forms of allowances which are available to individual taxpayers. The savings allowance looks straightforward, but it contains two alarming cliff edges. The marriage allowance should be simple, but in many instances the HMRC computer produces the wrong answer. The pensions annual allowance is now tapered for higher earners, based on a different definition of income than applies for the other allowances!

This is an
extract from our topical tax tips newsletter dated 29 September
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Savings allowance 
There is currently no HMRC guidance available on the interaction of the personal allowance, savings rate band (SRB), savings allowance, and different categories of income. This is a shame, as taxpayers need to appreciate how their savings will be taxed in the current tax year. 
From 6 April 2016 savings income (includes interest but not dividends) is taxed at 0% if it falls with the taxpayer’s savings allowance or SRB. The level of the savings allowance is determined by the taxpayer’s adjusted net income, not by reference to their highest marginal tax rate.
Adjusted net income is the taxpayer’s total taxable income before deduction of the personal allowance, but after deduction of losses, and after the thresholds have been expanded to give higher or additional rate relief for gift aid donations and pension contributions. Thus a basic rate taxpayer may have a savings allowance of £500 rather than £1000.
Example:
Colin’s adjusted net income before deduction of his personal allowance is £32,050. As his basic rate band threshold is £32,000, his savings allowance is £500 rather than £1,000. Colin’s tax liability is £4,110, calculated as follows:
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If Colin makes a gift aid donation of £40 net, (£50 gross), either within 2016/17 or before he submits his 2016/17 tax return, his basic rate band threshold is increased to £32,050. As his adjusted net income now lies within his basic rate band, his savings allowance set at £1000. Colin’s tax liability is reduced to £4010, saving £100

 
This is an
extract from our topical tax tips newsletter dated 29 September
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The
full newsletter contained the remainder of this item plus links to related source material and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>>