Personal Allowances and Allowable Interest

Income Tax is an unavoidable reality for the vast majority of the adult population. In fact most of those who pay tax may not even notice that they are doing it as a result of the fact that they are taxed ‘at source’ using the PAYE system. As a result, many people are unaware of exactly how much they are being taxed, and at which point this taxation begins.

In reality, both Income Tax and National Insurance Contributions (or NICs) are subject to a minimum income threshold. In practice, this means that the first portion of each individual’s income is non-taxable. This portion is known as the ‘personal allowance’. At its current level, the basic personal allowance threshold is set at £5,225. This rises to £7,550 once the individual reaches the age of 65, and rises again to £7,690 at the age of 75.

Total Income

It is important to note that this threshold is a level of ‘total income’; this means that the figure relates not only to your salary and other ‘earned’ income, but also to ‘unearned’ income such as bank and building society interest. As a result, if you have a large number of savings or investment vehicles, you could quite conceivably find your personal allowances occupied before your salary has been factored in at all. It is also important to understand the principle of income limits. As is outlined above, age-related allowances are made available to those over the age of 64. However, these allowances are subject to income limits, which are currently set at £20,900 for both allowance brackets. Under this regime higher earners are taxed more heavily; for every £1 which an individual over the age of 64 earns over their income limit, their age-related allowance will be reduced by 50 pence until the limit of the basic allowance is reached.

Allowable Interest

As mentioned earlier in this article, your personal allowance includes both earned and unearned income. However, there are certain circumstances in which you can claim tax relief against ‘allowable interest’ payments. The number of situations in which such relief is available was reduced in the last budget, but it is still offered to some individuals. The most frequently used form of relief is on interest paid on the purchase of life annuities. Other than this, it is also possible to claim relief against interest paid on purchases of shares in partnerships; the purchase of shares in a close company; and the purchase of machinery for use in a partnership. In these instances, the relief means that any interest paid on loans for these purposes is deducted from your total income for tax purposes.

In theory, the Inland Revenue should give you your personal allowances by default. However, for various reasons this often does not happen. If you think that you have paid too much tax you need to get a copy of form R40 from your tax office in order to apply for a repayment. Obviously, if you are a self-assessment taxpayer it is even more important that you are fully conversant with the schedule of personal allowances and available relief.

Related Articles in the 'Personal Income Tax' Category...

• Allowable Expenses and Deductions
• Are Social Security Benefits Taxable?
• How To Claim Back Overpaid Tax
• Income Tax and Pensioners
• Income Tax and Students
• What is Income Tax?
• What You Need To Know About Expenses Payments