Welcome to the February 2017 newsletter from Chamberlains

We’re getting towards the end of the tax year, so there are a number of things to think about.  Specifically, have you used as many of your tax-free allowances as possible?  Some won’t apply to you, but the main ones are:

  • Personal allowance – £11,000
  • Capital gains tax allowance – £11,100
  • Tax-free interest – up to £1,000
  • Tax-free dividends – £5,000
  •  “Sharing economy” allowances of £1,000 for each of trading and rental income
  • Rent-a-room allowance –  £7,500

In addition, there are various types of savings opportunities with annual limits, notably pensions and ISAs, and also gifts that can be made without any effect on IHT.


Personal allowance – £11,000

We are all – even children – allowed this amount of income without paying tax.  If you haven’t reached this amount, perhaps you could find a way of doing so!  On the other hand, perhaps you’ve reached this level but not your partner – in which case could there be a legitimate way to transfer some income to them?  However, it doesn’t work to give interest- or dividend-bearing investments to your minor children – the taxman treats the income as still yours.


Capital gains tax allowance – £11,100

Some people are fortunate enough to have a portfolio of assets that they can sell.  If these are now worth more than when they were acquired, you’d probably expect to pay capital gains tax.  However, each tax year you’re allowed gains of up to £11,100 without having to pay any tax.  Financial advisors (ask me for names!) are happy to suggest investments that gain in value rather than giving income – so-called “growth stocks”, for example.  If a portion of these are sold each year to make use of the annual CGT allowance, there’s effectively an opportunity for another £11,100 tax-free income every year, no matter what your other income may be.


Tax-free interest – up to £1,000

From the 2016/17 tax year onwards, basic-rate taxpayers are allowed to receive interest of up to £1,000 without paying tax – which is why since last April banks and building societies stopped deducting tax when they pay it to you.  Good news, for a change!  If you’re a higher rate taxpayer, you’re only allowed £500 tax-free, and if your income is over £150,000 the taxman doesn’t give you anything, ie. it’s £0 tax-free.As a result, most people won’t need to pay any tax on their interest income.  However, if you’re lucky enough to receive interest above these amounts, there’ll be extra tax to pay which would previously have been covered in part or in whole by the tax deducted before it reached you.  This will be done via your tax return, so some people may need to complete tax returns for the first time.As a tax-planning point, you may like to check whether you want to update your building society book to make full use of the £1,000 before 5 April – or you may decide to defer it into the next tax year.


Tax-free dividends – £5,000

Similar to the tax-free interest, there are now tax-free dividends for everyone (higher rate taxpayer or not) up to £5,000.  The previous system was that there was no further tax to pay on them anyway, unless they took you beyond the basic rate band – at which point you needed to pay a top-up to get the tax to the higher rate.  It’s nice to get the first £5,000 tax-free, but after that you have to pay extra tax of 7.5% or 37.5% if it takes you into higher rate tax.  For many people, the £5,000 will more than cover their dividend income, but it means more tax for the owners of many small companies.  For them, it was generally cheaper to pay themselves dividends than a salary (no National Insurance to pay).  They’ll now find that they have extra tax to pay.  I explained in more detail a few months ago – see my January 2016 newsletter.


“Sharing economy” allowances of £1,000 for each of trading and rental income

This was mentioned in last year’s spring budget,  but it starts from the next tax year, from April 2017.   If you’re perhaps taking the first steps in a new business while you continue in your current job, or if you just do a little “on the side” for your friends and neighbours, you may have very little income.  Until now, even if your net profit was just £500, you needed to show it on your tax return and to pay tax on it if it wasn’t covered by your personal allowances.  But not now.  If your income is lower than £1,000, you can simply ignore it – there’s no need to put it on your tax return.But it’s better than that:  If your income is over £1,000, you can set actual expenses against it to work out the taxable profit, or you can substitute the new £1,000 allowance – whichever’s the higher.  For example, your income from giving yoga classes (or e-bay trading or doing bike repairs, if you prefer) might be £5,000 and your actual expenses could be £750 – a profit of £4,250.  You can now show a profit of just £4,000 on your tax return by using the £1,000 rather than the real expenses.Before you start to get any clever ideas, I should perhaps mention that you can only use it for one trade each year!  Unfortunately you can’t have £1,000 for yoga classes and £1,000 for bike repairs.
The rental income allowance is similar, but it’s not likely to be relevant to many people.  HMRC suggests that it could help if you rent out your driveway for parking, or your loft for storage.  Perhaps it could help with Airbnb, but you’d probably cover that with the Rent-a-room allowance – which is my next point.


Rent-a-room allowance –  £7,500

This allowance has existed for a long time, but it only increased to £7,500 from 6 April 2016 – it had previously stayed at £4,250 for years.  The scheme lets you earn up to of £7,500 tax-free each year from letting out furnished accommodation in your home. It doesn’t just have to be a room – you can let out as much of your home as you want.  However, it’s halved if you share the income with your partner or someone else.If you have rent from your home-sharing of less than the £7,500, you don’t even need to put it on your tax return.  However, if you earn more, you can deduct either the £7,500 or the actual costs, whichever is the higher.  NB – you can of course include a proportion of mortgage interest – so the actual costs may well produce a lower figure for taxable rent.


Other things to consider before 5 April – ISAs and Pensions

ISAs have become increasingly generous and flexible over the years.  In the current tax year, you can shelter up to £15,240 – into cash, stocks and shares, or “innovative finance”, in any proportion.  Once the funds are under the ISA umbrella, any related income or capital gain is tax-free – and ISA’s can now be inherited by your spouse.  You have to make the investment before 5 April to benefit from this year’s allowance, otherwise it’s wasted.Given the low level of investment returns, and the new tax-free system for interest and dividends (see above) there doesn’t seem to be such an incentive to use ISAs  – but it doesn’t do any harm and psychologically the funds may feel safer stashed away like this.

Pensions, as I’ve often said, are among the best ways to save for the long term.  As a reminder, when you put £80 into a pension, HMRC top it up to £100.  So the £100 in your pension pot has cost you £80 – an immediate profit of £20 that gives you comfort if you see a stock market wobble.  Higher rate taxpayers do even better – they put the £100 on their tax return and effectively get a tax refund of £20, so their £100 has only cost them £60!  If higher rate taxpayers want to benefit from this, to reduce their tax liability for a particular tax year, the pension payment must be made in that same tax year – hence the urgency to action it before 5 April.  There are limits on the level of contributions, based on your earned income and with a ceiling of £40,000 – but unused allowances can be brought forward from previous years, and there are further restrictions is you’re fortunate enough to earn over £150,000 or if your pension pot is likely to have a value of over £1,000,000.  Too complicated to go into details now, but please let me know if you’d like more details.



There’s a Budget on 8th March – I’ll send you a summary of the highlights.  We’re not expecting anything exciting, but there’s normally something to surprise us.