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'. For the 2018-19 tax year, the basic personal allowance threshold is set at £11,850.

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 65. However, these allowances are subject to income limits, which are currently set at £27,000 for 2014-2015 and £27,700 in the 2016 to 2017 tax year for for over 65s and over 75s. For the 2013-14/2016-16 tax year, the basic personal allowance (for individuals under 65) is also reduced if your income exceeds £100,000. For every £2 by which your income exceeds £100,000, your personal allowance will be reduced by £1.

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 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
• 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.