Education

What main factors influence the charges of income tax?

posted by Chris Valentine

Last year, the government announced a change in the UK tax system following its promise to cut income tax and increase personal allowance. The new legislation was brought in to benefit millions of households across the UK with basic-rate taxpayers recouping, an average of £130 per year extra. With that, Wisteria Accountants have produced this article to help people understand the factors that influence the amount of tax you pay.

What influences the tax you pay?

That highly depends on what you earn. Here’s a breakdown of the income tax thresholds for 2019-20:

  • The personal allowance – the amounts of income we’re allowed to earn tax-free – is going up again in the new tax year, from £11,850 to £12,500.
  • The Basic rate Tax band (20%) will be £12,500 to £50,000
  • The Higher rate tax band (40%) will be £50,001 to £150,000
  • And the Additional rate tax band (45%) will be £150,000 and over

With 32 million of us across the national keeping more of our earnings, this new change should really benefit us. The increase in the personal allowance means we’ll get an extra £650 a year tax-free, and the new basic rate tax ceiling (a jump from £46,350 – £50,000) means higher earners will pay the lower rate of 20% on an additional £3,000 of their annual income.

What other factors should we consider?

It isn’t just your earnings that influence the amount you pay. Other factors too can have a big impact on your annual tax bill, most notably how you earn your money and how you invest it. Here are some of the ways you might reduce the amount you pay in income tax:

  • Dividend income – If a portion of your income comes from shares, you’ll benefit from a dividend allowance of £2,000. Any tax you pay over and above your allowance will depend on which tax band you fall into once you calculate your overall income. Basic rate taxpayers pay 7.5% on any dividend income they accrue above their allowance, higher rate taxpayers 32.5%, and additional rate taxpayers 38.1%.
  • Marriage allowance – If you’re married or in a civil partnership and you’re a basic rate taxpayer, you may be able to boost your personal allowance and reduce your income tax bill. If one partner earns significantly less than the other (and crucially the amount they earn falls below the personal allowance – currently £11,850), that person can transfer £1,190 of their personal allowance to their partner, reducing his or her income tax bill by up to £238 a year.
  • ISA – If you want to reduce your income tax bill, invest in an ISA. You can pay a big chunk of your salary (up to £20,000 a year) into an ISA without incurring any capital gains tax, dividend tax or income tax. Plus, any interest you earn from your ISA is completely tax-free.
  • Saving allowance – As a basic-rate or a higher-rate taxpayer, you’re entitled to a certain amount of tax-free income on any interest you accrue from savings (not counting your ISA, of course). This is set at £1,000 and £500 respectively.
  • Income from assets – If you get a portion of your income from capital gains (as a property developer, for example) you’re entitled to a certain amount of tax-free earnings. As of April 2019, the personal allowance for capital gains tax is set to increase to £12,000. That’s an extra £300 of tax-free profit on the sales of any assets.
  • Pension contributions – For higher earners, a good way to offset some of your income tax is to pay a little extra into your pension fund. Higher-rate taxpayers enjoy 40% tax relief on pension contributions, compared to just 20% for basic-rate taxpayers. So, putting a little extra away for your retirement could shave a few pounds off your annual tax bill.

To ensure you’re getting the most out of your earnings, it’s best researching as much as you can as there are plenty of resources online including this one and another option would be to speak to a professional.

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