Allowances explained below;
- What are tax allowances?
- What is the Personal Allowance?
- What is the age-related personal allowance?
- What is the starting rate for savings and the personal savings allowance?
- What is the Dividend Allowance?
- What is the Marriage Allowance?
- What is Blind Person’s Allowance?
- What is Married Couple’s Allowance?
- Can I transfer my allowances to my spouse or civil partner?
What are tax allowances?
Most tax allowances work by reducing your taxable income to reduce the amount of income tax you pay. This means that you can have a certain amount of taxable income each year, tax free.
You only pay income tax on taxable income that is above your tax allowances.
You are only eligible for UK tax allowances if you are resident in the United Kingdom or if you are a citizen of an EEA country.
If you are resident in the UK but not domiciled in the UK and you claim to use the ‘remittance basis’ of taxation, you may not be eligible for UK tax allowances
What is the Personal Allowance?
The Personal Allowance is a tax allowance that is available to most people who are resident in the UK. It reduces the amount of taxable income on which you pay tax.
The basic personal allowance is £12,500 for 2020/21.
The personal allowance can be reduced if your taxable income is over £100,000, but we aim this guidance at low-income taxpayers so do not cover those issues here.
If you were born before 6 April 1938, you may be able to claim a higher personal allowance for an earlier year,but note that it ceased in 2016/17. This was known as the 'age-related allowance'.
What is the age-related personal allowance?
The age-related personal allowance ceased in 2016/17, However, if you were born before 6 April 1938 you may be able to claim for earlier years. It used to increase your personal allowance and reduce the amount of tax you pay.
What is the starting rate for savings and the personal savings allowance?
Starting Rate for Savings (SR) - On 6 April 2015 the 10% starting rate was abolished and replaced by the 0% starting rate. The R85, the form used to inform a savings provider to pay interest gross was also discontinued.
The 0% band from 2015/16 through to 2020/21 is £5,000. It is restricted by non- savings taxable income so that none of the band will be available if that income is above their Personal Allowance (& Blind Person’s Allowance if claimed) plus the £5,000 starting rate.
Personal Savings Allowance (PSA) - On 6 April 2016 the Personal Savings Allowance was introduced, £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Additional rate tax payers aren’t eligible. These figures remain the same for 2020/21.
The two allowances work together and are dependent on your total taxable income.
Interest Paid Gross – From 6 April 2016 savings income is paid gross (without tax being taken). The R85 was also discontinued.
The easiest way to establish if you qualify is to add up your non- savings income, if it is below or within your personal allowance plus £5,000 then the Starting Rate for Savings will apply.
If this doesn’t cover all of your savings income then apply the Personal Savings Allowance. To determine which rate to use add up all of your taxable income including savings income. If it's £50,000 or less then use £1,000, if between £50,001 and £150,000, use £500. Note, Scottish tax payers use the UK rates and bands for savings.
Any savings income over these amounts will be taxable at the appropriate rate and although HMRC should be informed by the banks and building societies it remains your responsibility to ensure HMRC have the correct information. Where possible the amount owed will be collected via your tax code but if this isn’t possible a self-assessment tax return will be required.
Gift Aid – People who use the tax they pay on savings as part of their calculation to decide how much they can Gift Aid need to recalculate. Failure to do so may mean they Gift Aid too much and may end up with a debt to HMRC.
The following examples for 2020/21 explain the interactions between the SR and the PSA.
Example 1 - Alex is 71 and has non savings income of £11,000. In addition he receives £600 in savings income. His non savings income is below £17,500 and the savings income is within the 0% savings rate of £5,000. He doesn’t need to pay tax on his savings and doesn’t have to do anything.
Example 2 - If Alex’s non savings income is £17,100, it is still below the £17,500 threshold and £400 of his savings income is covered by the 0% savings rate. The remaining £200 is covered by the Personal Savings Allowance. He doesn’t need to pay tax on his savings and doesn’t have to do anything.
Example 3 - If Alex’s non savings income plus his saving interest is between £17,500 and £50,000, he will not be eligible for the 0% Starting Rate but his savings income will be covered by the Personal Savings Allowance of £1,000. He doesn’t need to pay tax on his savings and doesn’t have to do anything.
Example 4 - If Alex’s non savings income is between £50,001 and £150,000 he will not be eligible for the 0% starting rate and only £500 of his savings income will be covered by the Personal Savings Allowance. The remaining £100 is taxable at 40% and he will need to contact HMRC to arrange payment.
What is the dividend allowance?
The dividend allowance is £2,000. Any dividend payments above £2,000 are taxed at either 0%, 7.5%, 32.5% or 38.1% depending on your total taxable income. For example, a person receiving £3,000 in dividends won't pay tax if their total taxable income is under their personal allowance. However, they will pay tax on £1,000 at 7.5% if their total taxable income is between £12,501 and £50,000 at 32.5% on an income between £50,001 and £150,000 and 38.1% on income of £150,001 and over. Note, that Scottish taxpayers use the English rates and bands for dividends.
Gift Aid alert – People who at present, use the dividend tax credit as part of their calculation to decide how much they can gift aid need to recalculate. Failure to do so may mean they gift aid too much and may end up with a debt to HMRC.
What is the Marriage Allowance?
Introduced in 2015/16 this allowance should not be confused with Married Couple’s Allowance. If you are entitled to the Married Couple’s Allowance, you cannot claim this one as well.
The Marriage Allowance can be claimed by a married couple or civil partnership of any age, where one partner pays basic rate tax and the other is a non-taxpayer. The lower earner can transfer a fixed amount of £1,250 (10% of his or her Personal Allowance) to the other.
For example, Melinda earns £6,000 a year working part-time, so has £6,500 of unused Personal Allowance. She can therefore transfer £1,250 of her allowance to her husband Idris so long as his income does not exceed £50,000. As you can only transfer the fixed amount of £1,250, doing so when you have less than this amount of unused allowance will make you a taxpayer. However, you may be better off as a couple.
If you get divorced or dissolve your civil partnership contact HMRC to cancel the allowance. You can have the change applied at the start of the tax year (6 April) you got divorced in - or the start of the next one.
If you don’t tell HMRC, the allowance will end automatically at the end of the tax year (5 April).
What is Blind Person’s Allowance?
Blind Person's Allowance (‘BPA’) reduces the amount of taxable income that you have to pay tax on. If you are eligible for BPA, you are entitled to it in addition to the personal allowance or age-related personal allowance. If your income is not high enough for you to benefit from the allowance you can transfer the unused part it to your spouse or civil partner.
The BPA for 2020/21 is £2,500.
If you are entitled to BPA, you must tell HMRC to claim it.
You do not have to be entirely without sight to claim the BPA, but you do have to meet one of the following criteria:
- You can claim if you are registered as blind with a local authority in England and Wales; or
- If you live in Scotland or Northern Ireland, your sight must be so bad as to stop you performing any work for which eyesight is essential.
Entitlement to BPA does not depend on your age.
The amount of BPA to which you are entitled does not depend on your level of income. The BPA is not reduced where your income is more than a certain amount.
If both you and your spouse or civil partner are entitled to claim BPA you can each claim it independently,
The English and Welsh system in more detail
An eye specialist can check your sight and, if appropriate, certify that you are blind. You can ask your GP to refer you to an eye specialist.
Social Services should then contact you to see if you want to be added to the register, and if you do, then the date that the consultant signed your certification form is the date of registration.
Once you are registered, contact HMRC as soon as possible and tell them that you want to claim BPA.
If in the previous tax year you obtained evidence of blindness on which the registration will be eventually made, but you only registered the following tax year, you can claim the relief for both years.
What is Married Couple’s Allowance?
The Married Couple's Allowance (MCA) does not reduce the amount of taxable income on which you pay tax. Once your tax liability has been calculated the MCA is then removed. It can reduce your tax bill to zero but will not produce a refund.
You are only entitled to MCA if you are married or in a civil partnership and at least one of you was born before 6 April 1935.
MCA works by deducting 10% of the allowance from the tax due on your taxable income. If you are a tax payer your coding notice from HMRC should show half of the MCA amount.
For 2020/21 the full allowance is £9,075. This means you get a maximum deduction of £907.50 from your income tax.
In the year of marriage the allowance is calculated monthly, a marriage in June would mean that 7/12ths of the allowance would be available.
You can get married couple’s allowance in full in the year that you separate.
If you and your spouse or civil partner are later reconciled the allowance is available for the tax year of reconciliation. If this is also the year in which you separated, the allowance is given without any break.
What is the relief for maintenance payments?
Maintenance payments relief does not reduce the amount of taxable income on which you pay tax. It is used to calculate an amount to reduce your tax bill instead.
Maintenance payments relief is being phased out. You are only entitled to the relief if you meet all of the following conditions:
- You are separated or divorced or your civil partnership has been dissolved.
- You, or your ex-spouse or former civil partner, were born before 6 April 1935.
- You are making maintenance payments by Court Order.
- The maintenance payments are for the benefit of your ex-spouse or former civil partner or for your children under the age of 21.
- Your ex-spouse or former civil partner is not remarried or in a new civil partnership.
Maintenance payments relief works by deducting 10% of the relief from the tax due on your taxable income.
For 2020/21 the maximum relief is £3,510. This means you get a deduction of £351 from your tax liability.
If your maintenance payments are lower than £3,510, your deduction is 10% of the amount of maintenance you pay.
Full maintenance payments relief is available in the year of separation, but relief is not available after the spouse or civil partner remarries or registers a new civil partnership.
Can I transfer my allowances to my spouse or civil partner?
We are often asked if married couples or civil partners can transfer their tax allowances to their spouse or partner if they do not use them. Some allowances are transferable, but others are not.
Marriage Allowance - You can transfer some of your basic Personal Allowance to your spouse or civil partner, providing neither of you are higher rate tax payers and the one transferring has unused allowance.
Blind Person's Allowance - You can transfer the Blind Person's Allowance (‘BPA’) to your spouse or civil partner, if your income is too low to make use of it. Your surplus BPA can then reduce their taxable income for tax purposes. If you are a non-taxpayer and your spouse or civil partner pays tax you can still transfer your BPA to them. You can transfer the BPA by contacting HMRC.
Married Couple's Allowance - You can transfer the Married Couple’s Allowance to your spouse or civil partner, if your income is too low to make use of it.
If you are claiming both Blind Person’s Allowance and Married Couple’s Allowance you cannot transfer one allowance and not the other. You must transfer both allowances together.
How does marriage separation affect my tax allowances?
Separation affects your Married Couple's Allowance and may bring you entitlement to maintenance payments relief. As noted above, both of these allowances apply only if either you or your spouse or civil partner was born before 6 April 1935.
HM Revenue & Customs (‘HMRC’) will treat you as living together if you are separated due to circumstances beyond your control, for example, if one of you is taken into a nursing home or hospitalised long term.
For income tax purposes you are treated as living with your spouse or civil partner unless you are separated:
- under an Order of a Court, or
- by a formal deed of separation executed under seal, except in Scotland, where the deed should be witnessed, or
- in such circumstances that the separation is likely to be permanent.