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Income Tax rates and Personal Allowances

Current rates and allowances

How much Income Tax you pay in each tax year depends on:

  • how much of your income is above your Personal Allowance
  • how much of your income falls within each tax band

Some income is tax-free.

The current tax year is from 6 April 2018 to 5 April 2019.

Your tax-free Personal Allowance

The standard Personal Allowance is £11,850, which is the amount of income you don’t have to pay tax on.

Your Personal Allowance may be bigger if you claim Marriage Allowance or Blind Person’s Allowance. It’s smaller if your income is over £100,000.

Income Tax rates and bands

The table shows the tax rates you pay in each band if you have a standard Personal Allowance of £11,850.

Income tax bands are different if you live in Scotland.

Band Taxable income Tax rate
Personal Allowance Up to £11,850 0%
Basic rate £11,851 to £46,350 20%
Higher rate £46,351 to £150,000 40%
Additional rate over £150,000 45%

You can also see the rates and bands without the Personal Allowance. You don’t get a Personal Allowance on taxable income over £123,700.

If you’re employed or get a pension

Check your Income Tax to see:

  • your Personal Allowance and tax code
  • how much tax you’ve paid in the current tax year
  • how much you’re likely to pay for the rest of the year

Other allowances

You have tax-free allowances for:

You may also have tax-free allowances for:

Find out whether you’re eligible for the trading and property allowances.

You pay tax on any interest, dividends or income over your allowances.

Paying less Income Tax

You may be able to claim Income Tax reliefs if you’re eligible for them.

If you’re married or in a civil partnership

You may be able to claim Marriage Allowance to reduce your partner’s tax if your income is less than the standard Personal Allowance.

If you don’t claim Marriage Allowance and you or your partner were born before 6 April 1935, you may be able to claim Married Couple’s Allowance.

Previous tax years

The standard Personal Allowance from 6 April 2017 to 5 April 2018 was £11,500.

Tax rate Taxable income above your Personal Allowance for 2017 to 2018
Basic rate 20% £0 to £33,500
People with the standard Personal Allowance started paying this rate on income over £11,500
Higher rate 40% £33,501 to £150,000
People with the standard Personal Allowance started paying this rate on income over £45,000
Additional rate 45% Over £150,000

ExampleYou had £35,000 of taxable income and you got the standard Personal Allowance of £11,500. You paid basic rate tax at 20% on £23,500 (£35,000 minus £11,500).

Your Personal Allowance would have been smaller if your income was over £100,000, or bigger if you got Marriage Allowance or Blind Person’s Allowance.

Other rates and earlier tax years

HM Revenue and Customs (HMRC) publishes tables with full rates and allowances for current and past tax years.

Income over £100,000

Your Personal Allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means your allowance is zero if your income is £123,700 or above.

You’ll also need to do a Self Assessment tax return.

If you don’t usually send a tax return, you need to register by 5 October following the tax year you had the income.

 

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The big IR35 consultation

HMRC has published its keenly awaited consultation on the future of IR35. Radical changes are ahead for some freelancers and those who hire them. How could you be affected?

Consultation. On 18 May 2018 HMRC published its long-awaited consultation on the future of IR35 (see link below) . This makes clear that the public sector rules which were introduced in April 2017 will be extended to the private sector, but probably with a few minor changes.

Public bodies. The April 2017 changes shifted responsibility to public bodies for deciding if freelance contractors they use are caught by IR35 , rather than it being a question for those doing the work. Faced with fines for getting it wrong, many public bodies have either assumed IR35 applies or changed their working practices by not hiring freelancers.

Fine tuning. Naturally, HMRC is very happy with the 2017 changes and wants to see them rolled out to the private sector. However, there are shortcomings in the public sector model which even HMRC recognises. Therefore, much of the consultation is devoted to asking for suggestions on how it can be improved before being rolled out.

No change. Importantly, the consultation says that the rules for determining if IR35applies won’t be changed. This will still depend on whether the person doing the work would be self-employed if they worked for the client directly, i.e. not through their company or partnership.

When and how? Our guess is that the changes resulting from the consultation won’t take effect until April 2020. But if you want to have your say on how they take shape, you have until 18 August 2018 to submit your comments. Tip. If you use freelancers who work through a company or partnership, use the time before any new rules are implemented to review the contracts and terms of work to ensure that IR35 won’t apply. Loosening the level of control you have over the workers and how they do their job will be key to this.

The question of whether IR35 applies will be shifted from the worker to the hirer as is currently the case for public bodies. This will probably happen in 2020.
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Cash basis – decision time for some landlords

As a landlord you might need to make extra calculations when completing your 2017/18 tax return because of the new basis for working out profit. What sort of adjustments are required and is there a way to avoid having to make them?

Yet more new rules

The tax position for landlords has become more complex and tough in the last few years. One change which, we suspect, many will have overlooked is the imposition of the cash basis for working out profits for 2017/18 and subsequent years. This affects most landlords who are individuals, but not those who are companies, limited liability partnerships or trusts. It applies to commercial and residential lets.

When does the cash basis apply?

The cash basis automatically applies to individuals who receive rents (before expenses) of £150,000 or less per year. This is the reverse of the rules which applied prior to 2017/18. Until then, as a landlord you were required to work out your profits using normal accounting rules. The transition from one basis to the other requires special adjustments.

Tip. You can elect for the cash basis not to apply. This will avoid having to make the adjustments that are required because of the change (see The next step ).

Cash basis v normal accounting rules

As the name suggests, the cash basis means that you work out your profit taking account of rents etc. you’ve received and expenses you have paid. Profit using the normal accounting rules is worked out on rent receivable by you and expenses payable. So, as a rule of thumb, if your tenants are often in arrears with rent while you pay your bills on time, the cash basis will work well for you. But if the circumstances are reversed then the normal accounting basis is probably your best option.

Trap. If you elect to use the normal basis, it only applies for one year. If you want to continue on the same basis you must make an annual election.

Example. Jim lets out a shop for £2,000 per month payable in advance on the first of every month. When he prepares his 2017/18 tax return Jim must ensure the correct rents and expenses are reported. The £2,000 rent he received for April 2017 didn’t show in his accounts for 2016/17 because it related (except for a few days) to 2017/18. But because he received it on 1 April 2017, it won’t show in his cash basis accounts for 2017/18. Jim must make an adjustment by adding the £2,000 rent received on 1 April 2017 to what he receives in 2017/18. He might need to make similar adjustments for expenses he pays in advance, e.g. service charges, or he’ll miss out on tax deductions.

Other adjustments

Other adjustments might be required as a result of the switch to the cash basis. The most significant of these is for expenditure on equipment etc., which would have qualified for capital allowances under the normal rules, and interest on loans. The amount of tax relief for these can be permanently lost or gained; it’s not just the timing (see The next step ).

Tip. When completing your 2017/18 tax return review the adjustments required. You can then decide if you would be better off electing to stick with the normal basis.

For 2017/18, individuals who are landlords and receive rents of no more than £150,000 per year must work out their profit using the cash basis, i.e. income received minus expenses paid. Transition adjustments are required to avoid double accounting. You can elect to continue with normal accounting rules.
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MTD development on a go-slow

HMRC’s CEO has announced that the MTD process for individuals is slowing down to free up resources for work on Brexit. How might this affect you?

No change, almost. According to HMRC’s CEO, the go-slow “means halting progress on simple assessment and real time tax code changes” . He added that this doesn’t mean no changes at all. Anything that frees resources for other work, namely Brexit, will go ahead, but no details of what this might involve were given.

New. Simple assessments were supposed to play a big part in Making Tax Digital (MTD), and HMRC’s initial claim was that it would be a “New way of collecting tax that will make life easier for millions of customers” within self-assessment. However, so far HMRC has only used them sparingly and so you’re unlikely to notice any change because of the go-slow. In practice, this probably means that if you’re currently within self-assessment you’ll remain in it for a while longer.

Tax codes. The slowdown may have a more noticeable effect on HMRC’s dynamic coding. This was supposed to collect underpayments of tax which built up because of incorrect tax codes, by making in-year adjustments, but the system has struggled to cope. While HMRC hasn’t given any clues about exactly what will happen now, our guess is that there will be fewer dynamic coding changes. So if you want to avoid or reduce under or over-paying tax through PAYE, the onus will be on you to tell HMRC as soon as possible about changes which might affect your code number, e.g. starting to receive benefits in kind.

Tax credits and child benefit. Since no new tax credits claims can be made after January 2019, HMRC doesn’t intend to proceed with an online service for such claims. Instead it will focus on the beleaguered Tax-Free Childcare. There will be no significant changes to the existing child benefit system.

What about businesses? MTD for VAT is still on course for April 2019. And while HMRC admits that the introduction of a single online account for businesses will be delayed, there’s no suggestion that the April 2020 date for MTD for business will be put back… watch this space!

The go-slow will probably mean that if you’re in self-assessment you’ll remain so rather than receiving simplified assessments instead. Improvements to the tax coding system are also on hold.
DMS Posts

National Minimum Wage and National Living Wage rates

The hourly rate for the minimum wage depends on your age and whether you’re an apprentice.

You must be at least:

– school leaving age to get the National Minimum Wage
– aged 25 to get the National Living Wage – the minimum wage
will still apply for workers aged 24 and under

Current rates

These rates are for the National Living Wage and the National Minimum Wage. The rates change every April.

Year 25 and over      21 to 24         18 to 20      Under 18 Apprentice
April 2017
(current)                                    £7.50                     £7.05              £5.60          £4.05           £3.50
April 2018                                  £7.83                    £7.38               £5.90          £4.20           £3.70

 

Apprentices

Apprentices are entitled to the apprentice rate if they’re either:

– aged under 19
– aged 19 or over and in the first year of their apprenticeship

Example
An apprentice aged 22 in the first year of their apprenticeship is entitled to a minimum hourly rate of £3.50

Apprentices are entitled to the minimum wage for their age if they both:

– are aged 19 or over
– have completed the first year of their apprenticeship

Example
An apprentice aged 22 who has completed the first year of their apprenticeship is entitled to a minimum hourly rate of £7.05