By careful planning it is now possible to receive income of over £20,000 free of tax. This does not apply to everyone, but if you want to see how it is done then read on.
If you are able to choose how you receive your income then, unless you have total income in excess of £100,000, you can certainly receive £16,500 tax free. For the non-mathematicians amongst you, that is total tax free income of £33,000 per couple! The calculation here is quite simple as follows:
Personal Tax Allowance £11,000
Dividend Allowance £ 5,000
Savings Allowance £ 1,000 (reduced to £500 if Higher Rate taxpayer)
Total £17,000 (or £16,500 if Higher Rate taxpayer)
There is, however, up to a further £5,000 tax free in the shape of the 0% savings rate band. This is separate and in addition to the Savings Allowance above, and works as follows:
- If your total non-savings income is below the level of your personal allowance, currently £11,000 for most people, then savings income of £5,000 in excess of the allowances is tax free. This could add up to a total tax free income of £22,000.
- If your total non- savings income is less than £5,000 more than the personal allowance, ie between £11,000 and £16,000 for most people, then the balance of savings income to take total income up to the level of the personal allowance plus £5,000 is tax free.
- If total non-savings income exceeds personal allowance plus £5,000 then all savings income above the allowances is taxable
Phew! Let us look at an example.
George operates through his own company and receives a salary of £6,000, dividends of £10,000, and interest of £5,500. The calculation is as follows:
Total Income £21,500
Less Personal Allowance £11,000
= £10,500
At savings rate of 0% – £5,000
Savings Allowance – £500
Divided nil rate band – £5,000
Total tax payable = £Nil.
Of course, to pay a dividend of £10,000 George’s company would normally need to make a pre-tax profit of £12,500 on which it would pay Corporation Tax of £2,500 so it is a little misleading to say that the income is totally tax-free. Other people who are not owner/directors of their own company may find it somewhere between difficult and impossible to arrange their affairs to achieve this aim. But if you can then it is certainly worth looking at.