Income and capital gains tax mitigation

What is Income tax?

Nearly everyone who is resident in the UK for tax purposes receives a Personal Allowance, which is an amount of taxable income you're allowed to earn or receive each year tax-free.

This tax year (2014 to 2015) the basic Personal Allowance - or tax-free amount - is £10,000. You may be entitled to a higher Personal Allowance if you were born before 6 April 1948.If you're registered blind, or are unable to perform any work for which eyesight is essential, you can also claim the tax-free Blind Person's Allowance. Income Tax is only due on taxable income that's above your tax-free allowances.

Allowances and reliefs that can reduce your Income Tax bill

If you're due to pay Income Tax, there are a number of deductible allowances and reliefs that can reduce your tax bill. These include:

  • Married Couple's Allowance - the husband, wife or civil partner has to be born before 6 April 1935
  • Maintenance Payment relief - either you or your former spouse or civil partner must have been born before 6 April 1935

Unlike the tax-free allowances, these aren't amounts of income you can receive tax-free. Rather they're amounts that can reduce your tax bill.

Tax allowances and reliefs for employees or directors

If you're an employee or director you might be able to get tax relief for business expenses you've paid for.

Tax on company benefits

If you're employed and you receive non-cash benefits from your employer you will have to pay tax on them.

Benefits that you might have to pay tax on include:

  • company cars or vans

How much Income Tax you pay

After your allowable expenses and any tax-free allowances have been taken into account, the amount of tax you pay is calculated using different tax rates and a series of tax bands.

Income Tax rates 2014 to 2015 by tax band and type of income

Income Tax band

Income Tax rate on non savings income

Income Tax rate on savings

Income Tax rate on dividends

£0 to £2,880
Starting rate for savings

Not available

10%

Not applicable - see basic rate band

£0 to £31,865
Basic rate

20%

20%

10%

£31,866 to £150,000
Higher rate

40%

40%

32.5%

Over £150,000
Additional rate

45%

45%

37.5%

       

Because the rate of Income Tax you pay on savings is worked out after any non-savings income has been taken into account, if your non-savings income is less than the starting rate for savings limit (£2,880) - or if savings and investments are your only source of income - your savings income will be taxed at the 10 per cent starting rate up to the limit. But if you already have non-savings income which takes you above the starting rate limit, all of your savings will be taxable at the 20 per cent basic rate, the 40 per cent higher rate or the 45 per cent additional rate, depending on your total income.

Remember, the tax band applies to your income after your tax allowances and any reliefs have been taken into account - you're not taxed on all of your income.

'Non savings income' includes income from employment or self-employment, most pension income and rental income.

'Dividends' means income from shares in UK companies.

Savings and dividend income is added to your other taxable income and taxed last. This means you pay tax on these sorts of income based on your highest Income Tax band.

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