Income tax savings for families

The government is keen to reduce the number of people on low incomes that are caught in the tax net. In an extension to the changes made since 2010, which have reduced the tax liabilities of 28 million people and taken four million people out of the income tax system, the Chancellor reconfirmed the previous announcement, made by the former chancellor, that the personal allowance will increase to £11,500 , and that the higher rate threshold will increase to £45,000 from April 2017.

He also confirmed the government’s commitment to increase these thresholds to £12,500 and £50,000 respectively by the end of the Parliament.

This means an individual on the national average wage will save £100 in income tax over the next year and the increase to the higher rate threshold could generate an additional £300 saving.

It is also worth noting that each time the personal allowance is increased, so does the band for those caught to 60 per cent tax. The personal allowance is withdrawn for those earning more than £100,000 at a rate of £1 allowance for each £2 above this amount, creating a tax rate of 60 per cent. Back in 2010, when the personal allowance was £6,475 income between £100,000 and £112,950 was subject to tax at 60 per cent. By the time the personal allowance reaches £12,500 the band will be £25,000 wide so that someone with income at £125,000 will be paying £2,410 more in tax than they were in 2010. It is disappointing that the government have not yet taken the opportunity to correct this anomaly.

Many individuals with small amounts of property and/or trading income will benefit from the new allowances of £1,000 for each type of income from April 2017. Income under this limit will no longer need to be declared to HMRC reducing the compliance burden and associated tax liability.

So now, in addition to the personal allowance, there are exempt allowances for a range of income types, including:

Trading: £1,000
Rental: £1,000
Savings: up to £1,000
Dividends: £5,000
Rent and rent-a-room: £7,500

Each of the amounts are different and each interacts or potentially impacts on others.

RSM welcomes the increases in the tax allowances and thresholds; however the increased number of allowances available does bring unnecessary complication to the tax system.

What should you do?

Couples should review the manner in which they hold their assets to ensure that they are making the best use of the available allowances – particularly where income producing sources are currently held solely in the name of one spouse.

Owner managed businesses should take the opportunity to review their overall remuneration strategy to make sure that they are structuring their affairs in the most tax efficient manner, and make use of all the available allowances.