Investors and Savers: The Personal Allowance

Posted by siteadmin on Tuesday 22nd of March 2016.

Last year’s Budget revealed that that the 2016/17 personal allowance would be £10,800, but the Summer Budget added a further £200 bringing the figure to a round £11,000. Similarly, the 2017/18 allowance was originally announced as £11,000 in Spring 2015, raised to £11,200 in July 2015 and increased again in this Budget to £11,500.

However, many people do not even use the current personal allowance (£10,600 in 2015/16), and in 2016/17 there will be a near £3,000 gap between the allowance and the unchanged starting point for National Insurance contributions (£8,060). At the other end of the income scale, some taxpayers will have no personal allowance in 2016/17 because their income exceeds £122,000, at which point their allowance is tapered to nil.

If you or your partner does not use the personal allowance, you could be paying more tax than necessary. There are several ways to make sure you 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.

  • Couples should consider rebalancing investments so that each has enough income to cover the personal allowance.
  • Make sure that in retirement you (and your partner) each have enough pension income. On their own, neither state provision is enough, be it the basic state pension (£119.30 a week in 2016/17) or the new single-tier pension of up to £155.65 a week (for those reaching State Pension Age after 5 April 2016.

The Personal Savings Allowance

The personal savings allowance (PSA) was revealed in last year’s Spring Budget, but only begins in 2016/17. Broadly speaking, if you are a:

  • basic rate taxpayer, the first £1,000 of savings income you earn will be untaxed;
  • higher rate taxpayer, the first £500 of savings income you earn will be untaxed;
  • additional rate taxpayer, you will not receive any personal savings allowance.

Savings income’ in this instance is primarily interest, but also includes gains made on offshore investment bonds. Although called an allowance, the PSA is actually a nil rate tax band, so it is not quite as generous as it seems. The PSA’s arrival will mean that from 6 April 2016 banks and building societies will no longer deduct tax from interest and neither will National Savings & Investments from those products it currently pays net interest on (such as 65+ bonds). The Budget announced that from 2017/18 the removal of the requirement to deduct tax on interest payments would be extended to open-ended investment companies, authorised unit trusts, investment trust companies and peer-to-peer loans arrangements.

If you and your spouse/civil partner receive substantial interest income, it is worth checking that you both maximise the benefit of the PSA. However, at current miserably low interest rates, you might also want to consider whether you could earn a higher income by choosing non-deposit investments.