How Much Can I Receive Tax-Free In 2017/18?

Lee Sharpe looks at the optimal mix of incomes to make best use of readily available allowances, etc., in the tax year 2017/18.

Everybody knows that you have a tax-free personal allowance of £11,500 in the 2017/18 tax year (starting 6 April 2017), but what else is there to make use of?

Starting rate for savings

This has been around for many years, and is there to help those with modest incomes – typically pensioners – to preserve bank interest on their savings without having to pay additional tax. It used to be a relatively small amount but was almost doubled last year to £5,000. However, it is available only to the next £5,000 of income over and above the tax-free personal allowance, so can be exploited only when you have earnings, rental income and similar of little more than £11,500 and plenty of bank or building society interest to make the best use of the £5,000.

Savings ’allowance’

This relatively new so-called ‘allowance’ is, in fact, a nil-rate band exclusively for bank interest and similar savings income; however, unlike the starting rate for savings, this band ‘floats’ and will apply a nil tax rate to the next up to £1,000 of savings income that has not already been met by either the standard tax-free personal allowance, or the starting rate for savings above. The savings ‘allowance’ is currently set at £1,000, although it is restricted when overall income exceeds the higher rate threshold.

Dividend ’allowance’

This is another so-called ‘allowance’ designed to sweeten the pill of the new dividend tax rates that were introduced in April 2016. It is again effectively a ‘floating’ nil-rate tax band – this time of £5,000 – applicable only to dividend income, although it does not decrease if total income gets too high, unlike with the aforementioned savings ‘allowance’. (This is due to fall to £2,000 a year from 2018/19, as just announced in the 2017 Spring Budget).

Rent-a-room

This is for owner-occupiers who take in a lodger in their main home, and was recently uprated to cover up to £7,500 worth of gross receipts. It Is halved where the residence is let out jointly (so a husband and wife would get £3,750 each). The scheme is available for ‘bed and breakfast’, or similar guest house activities, provided in the owner’s main home, which would otherwise be considered a trading activity, or for the more basic provision of furnished accommodation that would otherwise fall more within the scope of a property rental business.

Where the gross receipts are up to £7,500 annually, the owner-occupier may ignore both income and expenses. Where gross receipts exceed £7,500, then either: (a) deduct £7,500 from the receipts and tax the balance, ignoring any actual expenses; or (b) simply use standard methods and ignore rent-a-room completely. Those with more substantial income and expenses – or contemplating losses – would, therefore, do well to avoid rent-a-room.

Trading allowance

There is a ‘trading allowance’ (new for 2017/18) of £1,000, designed so that people do not have to submit tax returns for small amounts of casual income. As well as covering trading or professional profits, it will also cover miscellaneous income (strictly, ‘income not otherwise chargeable’, as per ITTOIA 2005, Pt 5 Ch 8).

Where gross income receipts from trading, etc., are up to £1,000, the allowance will automatically apply so that all income and expenses are ignored (note - this may also mean that losses are forfeit, unless you elect to disapply the allowance). Where gross receipts exceed £1,000, the taxpayer can either calculate trading profits or losses as normal, or instead elect to deduct the £1,000 allowance from gross receipts but forego any expenses. This will, of course, be beneficial only where there are no expenses, or where incomes are only a little higher than £1,000, making the new allowance relatively simple and worthwhile.

Property allowance

Just like the new trading allowance, an additional £1,000 (new for 2017/18) is available for ‘casual’ letting income, covering up to £1,000 of gross receipts. It works in a very similar fashion to the new trading allowance above, so will be of limited utility to those with substantial property income, expenses, or contemplating losses.

New allowances and rent-a-room

Some people think that you cannot have both the new property or trading allowances and rent-a-room. This is wrong; any income that attracts rent-a-room relief will not be eligible for either of the new allowances, but other income may still qualify, subject to its not being derived from partnerships (a general exclusion), or basically where the individual could have had rent-a-room but opted to claim expenses instead.

Transferable tax allowance (‘marriage allowance’)

Not to be confused with the venerable married couples’ allowance (see later), this is a relatively new device worth up to £230 of tax, rather than tax-free income. Thanks to (in my view) horrendous misinformation courtesy of HMRC, many people (including some advisers) are either failing to make good use of this allowance, or misunderstood how it works.

The simplest explanation is that one spouse or civil partner can elect to sacrifice exactly 10% of his or her tax-free personal allowance (so £1,150 in 2017/18), if doing so does not push them beyond being a basic rate taxpayer. The nominated spouse/civil partner should then automatically get a corresponding basic rate tax credit (so £230 in 2017/18), provided he or she is not already paying tax above the basic rate.

Example: Tax-efficient income

Richard Dastardly (conveniently) has the following income in 2017/18:

State Pension £175 per week 9,100

Private Pension £200 per month 2,400

11,500 Covered by tax-free personal allowance

Bank interest 6,000 Covered by starting rate‘allowance’ (£1,000) (£5,000) and savings

Dividend income 5,000 Covered by dividend ‘allowance’

22,500

Plus:

He rents a room in his home to

Miss Pittstop for £625 a month 7,500 Excluded by ‘rent-a- room’ scheme

Mr Muttley uses his drive whilst

he's at work for £83 a month 1,000 Excluded by ‘rental allowance’

And he provides race commentary

for £83 a month 1,000 Excluded by ‘trading allowance’

32,000

But that’s not all.

Richard’s spouse does not use all of her tax-free personal allowance, and she has elected to ‘transfer’ some to Richard. Richard, therefore, has an extra £230 tax credit to use – and so far, he has not actually paid any tax, so it could be wasted, except:

(a) He also has a further £1,150 of bank interest, (£1,150 @ 20% = £230); or

(b) He also has a further £3,066 of dividend income (£3,066 @ 7.5% = £230)

If Richard just happens to have the right ‘mix’ of incomes, he could ‘earn’ just over £35,000 and effectively pay no tax.

Other claimables

Capital gains tax annual exemption (£11,300 for 2017/18) – not income, but an annual amount that is often under-utilised;
Blind person’s allowance (£2,320 for 2017/18);
‘Old’ married couple’s allowance – like the new transferrable tax allowance for couples, it acts to reduce an existing tax bill. It is now available only where at least one spouse was born before 6 April 1935; it cannot be used alongside the new transferrable tax allowance, and is tapered once income gets too high – so can offset at least £326 in tax already paid, but potentially as much as £844.50.

Conclusion

Clearly, the above example is highly contrived – Mrs Dastardly owns none of their home (so the husband gets the full £7,500 rent-a-room relief), and has spare personal allowance, but Mr Dastardly would have to have very substantial funds to generate such levels of bank interest and dividends – so why aren’t funds owned jointly? But the example does serve to illustrate just how much income can be enjoyed before any tax is actually due, given the right circumstances. Organising one’s wealth to achieve just the right amounts in different income classes would be a full-time occupation, and beyond the reach of many. But it might be fun to try!