The UK tax system is incredibly complicated, making it very difficult to ensure that you do not pay more tax than you need. The first point to check is that you are making the most of your tax allowances.
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These apply per tax year, which runs from April 6 to April 5.
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Income tax allowances
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- Personal allowance: Everyone gets a personal allowance, which is the amount of income you can earn before you start paying income tax. It doesn’t matter where your income comes from - earnings, pension, savings, or investments - you still get the same allowance. Your personal allowance is not transferable, so if you don’t have any income to set against it, you can’t use it. Couples can get round this by holding income-producing savings or investments in the name of the non-earning partner
- Age allowance: The over 65s get an extra age allowance on top of their personal allowance. They are only entitled to the full allowance if their income is below a set amount, £17,900 for 2002-03. Once it goes over that limit, the age allowance gradually slides away until they are back to the basic personal allowance.
- Married couple’s allowance: Married couples where at least one partner was 65 on or before 5 April 2000 still get the married couples allowance. This was abolished for all other married couples from 5 April 2000. You can find out more about this allowance in the section on Tax and the over 65s. The married couple’s allowance normally goes to the husband but can be transferred to the wife if, for example, she works and he doesn’t.
- Blind person’s allowance: Anyone registered as blind with a local authority can claim blind person’s allowance. A registered blind person must be unable to perform any work for which eyesight is essential.
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Tax credits
There are two tax credits you may be able to claim:
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- Working families’ tax credit: This was introduced in October 1999, replacing Family Benefit. Low income couples or lone parents with one or more children who work at least 16 hours a week can claim the credit.
- Children’s tax credit: This is worth around £10 a week to and is available to all families with one or more children and at least one working parent earning up to around £42,000. It is set against the income of the parent with the higher earnings, and starts to be withdrawn once income reaches the higher rate tax threshold. The credit is doubled for a year for new babies.
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From 2003/04 these credits will be replaced by the working tax credit and child tax credit.
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Allowances
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| 2001-02 | 2002-03 |
| Personal allowance | | |
| Under 65 | £4,535 | £4,615 |
| 65-74 | £5,990 | £6,100 |
| 75 & over | £6,260 | £6,370 |
| Married couple’s allowance | | |
| 65-74 | £5,365 | £5,465 |
| 75 & over | £5,435 | £5,535 |
| Minimum | £2,070 | £2,110 |
| Blind person’s allowance | £1,450 | £1,480 |
| Children’s tax credit | 5,200 | 5,290 |
| Children’s tax credit - baby rate | - | 10,490 |
Other allowances
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- Capital gains tax allowance: Everyone gets a capital gains tax allowance, set at £7,700 for 2002-03. You can make profits up to this sum each year without paying any tax.
- Rent-a-room scheme: Property owners prepared to let out a room in their home can earn £4,250 a year tax-free from a lodger under this scheme.
- Isa allowance: You can put up to £7,000 a year into individual savings accounts (Isas) to earn tax-free income and gains.
- Pension allowance: You get full tax relief on payments into a pension scheme up to certain limits. From 5 April 2001, everyone (except members of occupational pensions schemes earning more than £30,000 a year) can put up to £2,808 into a stakeholder pension each year net of basic rate tax (£3,600 gross).
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Copyright The Financial Times Limited 2008
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