Pensions and tax
Personal allowances and income tax rates
This page provides an explanation of the main tax allowances and tax rates.
Tax is complicated and we can’t provide a comprehensive guide on tax, but below is an explanation of all the main tax allowances and rates that you will need to know about.
However, we aren’t tax experts so if you have a specific question regarding tax, we recommend you seek the services of a regulated tax expert.
Under current rules, UK nationals are entitled to the UK personal allowances whether they are a resident in the UK or abroad. If you qualify, you normally get a personal allowance each tax year to set against your taxable income.
Your personal allowance is, effectively, the amount of income you can have in that tax year before you start paying tax. There is a standard personal allowance that is determined and published by the Government for each tax year.
The standard personal allowance for 2018-19 tax year is £11,850.
This allowance is subject to the £100,000 income limit. The individual’s personal allowance is reduced where their income is above this limit. The allowance is reduced by £1 for every £2 above the limit.
Married couples allowance
If you are married or in a registered civil partnership and you and/ or your spouse or civil partner were born before 6 April 1935, you can also claim a married couple’s allowance (MCA). This allowance is reduced when your income is above the limit of £28,900. This is at a rate of £1 for every £2 above the income limit until it reaches the minimum amount. Any reduction in the married couple’s allowance applies after any reduction to the individual’s personal allowance.
For the 2018-19 tax year, the maximum allowance is £8,695 and the minimum allowance is £3,360.
The married couple’s allowance is not a ‘tax-free’ allowance in the same way as the personal allowance. It gives a credit of 10% of the amount of the MCA to set against your income tax liability.
Tony was born in 1933. He has income from all sources of £30,900 in 2018-19. His wife, Gwen, has income of £18,000.
Tony’s income exceeds £28,900 by £2,000, so his married couple’s allowance is then reduced from £8,695 to £6,695. This means that Tony’s MCA can reduce his tax liability by £699.50.
The MCA is normally claimed by the spouse with the higher income, although it can be transferred, in full, to the other partner, or shared equally, by making an election to HMRC.
This transferable allowance is available to married couples and civil partners who are not in receipt of married couple’s allowance. A spouse or civil partner who is not liable to income tax; or not liable at the higher or additional rate, can transfer this amount of their personal allowance to their spouse or civil partner. The recipient must not be liable to income tax at the higher or additional rate.
The allowance for 2018-19 is £1,190. The relief for this allowance is given at 20%.
Blind person’s allowance
If you’re blind, or become blind during the course of the tax year, you can claim a special, additional personal allowance. It means you can earn more before you start paying income tax. The Blind person’s allowance for the 2018-19 tax year is £2,390.
To qualify for this additional allowance you must:
- Live in England or Wales and be registered on your local authority’s register of blind persons; or
- Live in Northern Ireland or Scotland and be so blind that you cannot perform any work for which eyesight is essential.
You can't claim the blind person’s allowance if you are not a UK resident.
Income tax rates
Once your earnings and other income (e.g. rental income and income from savings and investments) exceed your personal allowance, the excess becomes liable to income tax. Income tax rates are banded depending on the amount of your taxable income. Your taxable income is broadly your gross income (your income from all sources before tax) less any allowable deductions (including contributions to a defined benefit or money purchase pension scheme) less your personal allowance. From April 2017 tax bands will differ slightly in Scotland. than they do in the rest of the UK.
The different rates and bands of income tax for the tax year 2018-19 in England, Wales and Northern Ireland are:
|Taxable income||Tax rate||Notes|
|£0 - £34,500*||20%||Basic rate tax|
|£34,501 - £150,000||40%||Higher rate tax|
|£150,000 or more||45%||Additional rate tax|
* The basic rate tax band is stretched by the gross amount of any member contributions to a personal pension scheme.
For Scotland, the different rates and bands of income tax for the tax year 2018-19 are:
|Taxable Income (Scotland) *||Tax Rate (Scotland)||Notes|
|£0 - £13,850||19%||Starter rate tax|
|£13,851 - £24,000||20%||Basic rate tax|
|£24,001 - £43,430||21%||Intermediate rate tax|
|£43,431 - £150,000||41%||Higher rate tax|
|£150,000 or more||46%||Additional rate tax|
*Applies to non-saving, non-dividend income only. Savings income will be taxed based on the tax bands in England, Wales and Northern Ireland.
Savings income includes income from savings, such as bank and building society interest, coupons from fixed interest securities, income distributions from investments that are not dividends and payments from some National Savings and Investments products.
Non-savings income is, broadly, your taxable income less any savings income less any income from dividends.
If you have paid contributions to a personal pension scheme (including (including stakeholder pensions), you would have paid your contributions net of basic rate income tax relief at source. Any higher rate tax relief that you may be entitled to is provided by ‘stretching’ your basic rate tax band by the amount of the gross pension contribution (the amount you paid plus the basic rate tax relief claimed on your behalf by the pension provider).
For example, John lives in England and paid £4,000 of contributions to his personal pension in 2018-19.This represents a gross contribution of £5,000, so John’s basic rate tax band is stretched to £39,500 in 2018-19. If John lived in Scotland his basic rate tax band would be stretched to £37,500.
Starting rate limit (savings income)
There is a starting rate of £5,000 of savings income that can be received tax free.
After personal allowances are taken into account, if an individual’s taxable non-savings income exceeds the starting rate limit, then the starting rate for savings will not be available for savings income.
If your total taxable income is less than £17,000 you won’t pay tax on any savings income.
Personal savings allowance
As of April 2016, the new Personal Savings Allowance means that basic rate taxpayers will not have to pay tax on the first £1,000 of savings income they receive and higher rate taxpayers will not have tax to pay on their first £500 of savings income. Additional rate tax payers will not benefit from this allowance.
Banks, Building Societies and NS&I will no longer deduct tax from the interest on their savings accounts.
The personal savings allowance will be uprate by Consumer Price Index (CPI) in future tax years.
As of April 2016 the dividend tax credit has been abolished and replaced with a new £5,000 tax-free Dividend Allowance. You will be able to receive £5,000 worth of dividends tax free and then will pay the following on any excess:
|Basic rate tax payer||7.5%|
|Higher rate tax payer||32.5%|
|Additional rate tax payer||38.1%|
Total dividend income will still count towards earnings and could push you into a higher tax brackets.
Dividend income in a pension or ISA does not count towards earnings and will not push you into a higher tax bracket.
Where can I find out more?
If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.