ATXP6 UK
Syllabus A1. Income tax A1f. Income tax computation and income tax liability

A1fi. Allocation of the personal allowance

Syllabus A1fi)

Understand the allocation of the personal allowance to different categories of income.

Which income should the P.A. be given to?

The personal allowance to be offset against income in the most tax-beneficial manner.

This may require the personal allowance to be offset against dividend income before it is offset against savings income.

This will be easier to understand with the illustrations below!

Illustration

Able has pension income of £8,000, savings income of £4,500 and dividend income of £9,000. 

What is his income tax liability?

  • Solution

    Pension income £8,000
    Savings income £4,500
    Dividend income £9,000
    Total income £21,500

    Less: P.A. (£11,850)

    Taxable income  £9,650

  • Pension income
    £8,000 covered by the P.A.

    Savings income
    £4,500 covered by the 0% starting rate 

    Dividend income
    £3,850 covered by the P.A.
    
£2,000 at 0% (Dividend NRB)
    
£3,150 * 7.5% = £236

    Income tax liability £236

  • Note

    The personal allowance has been offset against the dividend income in priority to the savings income in order to maximise the tax saved.

    If the personal allowance had been offset against the savings income, there would have been an additional £3,500 of dividend income which would have been subject to income tax at 7.5%.

    There is a 0% starting rate for savings income which falls within the first £5,000 of taxable income, and, possibly, a savings income nil rate band of either £500 or £1,000. These must be taken advantage of if at all possible.

    Accordingly, it will not be tax-efficient for savings income to be relieved by the personal allowance if it would otherwise be taxable at 0%.