Making use of allowances can further reduce the tax you pay

For must approaching retirement, securing a dependable income is the number one priority – and one that has been getting more difficult.  We take you through some allowances available.

Personal allowance

The main bulk of tax-free income comes from the personal tax-free allowance.  At present, anyone earning less than £100,000 does not have to pay tax on their first £11,500 of income.  This could be income from employment, an annuity and investment income not covered by other tax allowances or other sources.

Personal savings allowance

The personal savings allowance came into force in April 2016.  Every basic rate (20pc) taxpayer receives the first £1,000 of interest earned on savings accounts each year tax free.  Those who have total taxable income of less than £17,000 don’t pay tax on any savings income.  Higher rate taxpayers have a £500 allowance, and those with income over £150,000 have no allowance at all.  This applies to interest earned from easy access accounts, high interest current accounts, fixed-rate bonds and any other savings accounts.  You don’t need to do anything to claim your personal savings allowance.  All savings interest is now paid without any tax being deducted. If you exceed the allowance banks and building societies provide HMRC with the information they need to collect any tax due via your tax code.

Dividend tax allowance

Until April 2018, anyone who owns shares outside of an ISA – including investors and company directors – does not have to pay tax on their first £5,000 of dividends in a tax year.  However, in the March budget, the Chancellor announced that from April 2018, the dividend tax allowance will fall to £2,000.

Any income from an ISA

Unlike pensions, aside from the 25pc lump sum that can be taken tax free, the income from any ISA holding is completely free tax.  If you own shares or funds in an ISA that pay out a dividend, no income tax is due on these dividends.  This should be the default route for any investor wanting to generate an income from their portfolio.  On April 6 2017, the amount that can be contributed to an ISA in a tax year increased from £15,240 to £20,000.

Premium Bonds

Premium bonds do not pay out a guaranteed rate of interest, but any income from winnings is tax free.

John BaxterComment