Allowances and exemptions
Allowances and exemptionsLet's start by looking at some of the worthwhile strategies you could apply within the family. Each member of your family is taxed as an individual - entitled to his or her own allowances and exemptions. For 2007/08Allowances and rates bands are allocated first to your earned income (which includes pensions), then to your savings income, then to any UK dividend income, and finally to any capital gains.
| Income tax rates for 2007/08 |
Earnings etc |
Savings |
UK Dividends |
| First £5,225 |
- |
- |
- |
| Next £2,230 |
10% |
10% |
10% |
| Next £32,370 |
22% |
20% |
10% |
| Excess |
40% |
40% |
32.50% |
| Capital Gains |
|
|
|
| First £9,200 |
|
- |
|
| Remainder |
|
up to 40% |
|
Case StudyKeith is a single person with a gross income of £40,000 (made up of £25,000 earnings, £5,000 of interest and grossed-up UK dividends of £10,000) and capital gains of £10,000 (assuming no other reliefs, etc) would have a tax liability of £6,442.27 as shown below.
| |
Earnings |
Interest |
UK Dividends |
Gains |
| Income |
25,000 |
5,000 |
10,000 |
10,000 |
| Deduct: Personal Allowance |
-5,225 |
|
|
|
| Deduct: CGT Exemption |
|
|
|
-9,200 |
| Taxable |
19,775 |
5,000 |
10,000 |
800 |
| Tax at: 10% on |
2,230 |
|
|
|
| 22% on |
17,545 |
|
|
|
| 20% on |
|
5,000 |
|
|
| 10% on |
|
|
9,825 |
|
| 32.5% on |
|
|
175 |
|
| 40% on |
|
|
|
800 |
| Totals |
£4,082.90 |
£1,000.00 |
£1,039.37 |
£320.00 |
| |
| Total Tax Liability = £6,442.27 |
With effect from 6 April 2008, the basic rate of income tax will be reduced from 22% to 20%. However, countering this reduction, the 10% starting rate tax band will be removed for all types of income apart from savings income. In addition, the national insurance upper limit (the level up to which the employee’s contribution is charged at 11%) will be increased by £3,900 per annum above the inflation increase. The overall effect of these changes is relatively ‘tax-neutral’.
|