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Tax Efficient Use Of Your Personal Allowances

March 31, 2016

Advice for property investors on capital allowances from Optimise Accountants

By Simon Misiewicz

Did you know that you can reduce your taxable income through your personal allowances?

The problem – not many people take advantage of their allowances

When you do your self assessment you take into account all of your personal income, your costs and your taxable profit. This will allow you to work out your taxable income, which you declare and pay the relevant tax on.

Unfortunately, many people leave out a crucial stage — reviewing their personal allowances. This fundamental omission means many will pay more tax than they need to.

Below I’ve listed some of the top things to look out for.

Age Allowance — an extra £60

I appreciate that this is not very much, but you can increase your personal allowance by £60 simply by declaring your age on your tax return. If you were born before 6th April 1938 then you would have a personal allowance of £10,660. This is, however, restricted if you earn more than £27,700.

Let’s look at an example:

Mary is 79 and earns £12,000. Her personal allowance is therefore:

£10,660 less

(£0) restriction = 50% X (£12,000 minus £27,700)

So £10,660 is the maximum personal allowance that may be claimed by Mary.

Let’s look at another example:

John is 78 and earns £30,000. His personal allowance is therefore:

£10,660 less

(£2,300) restriction = 50% X (£30,000 minus £27,700)

£10,600 (The minimum personal allowance is £10,600. Although the restriction is in place, you are not penalised beyond the minimum personal allowance).

Higher rate taxpayers 

Please note that your personal allowance may be reduced if you have earnings greater than £100,000. For every £2 made your personal allowances will fall by £1.

Let’s take a look at an example:

Joseph earns £120,000 and his personal allowance is £10,600.

£10,600 personal allowance

(£10,000) restricted =  (50% X £120,000 minus £100,000)

£600 new personal allowance.

Married couples allowances — up to £835.50 tax relief 

Before you get excited, the married couples allowance (MCA) is only available to couples where one of them were born before 6th April 1935. The MCA is £8,335 but like the age related personal allowances it is reduced if you earn more than £27,700.

The MCA provides 10% tax relief of the £8,335, therefore 10% of this amount gives you a tax relief of £835.50. Only one person may elect to use the MCA.

Let’s take a look at an example:

Joseph, aged 77, and Edna, aged 81, are married. Joseph does not earn any money so it would not be beneficial for him to claim the MCA. Therefore Edna, who earns £32,000, does claim it. The MCA is, however, restricted as she earns more than £27,700. Let’s see the mechanics of this:

£8,355 MCA

-£2,150 restricted = (50% X £32,000 minus £27,700)

£6,205 MCA still to claim

£620.50 — 10% tax relief

Please note that the above does not take into affect any adjustments to the personal age related allowances.

You can use HMRC’s MCA calculator to see what allowances you will get. Please note that the MCA is based on the number of months in the fiscal year that you were married.

Transfer your personal allowance to your spouse

You can transfer part of your personal allowance to your spouse if you do not earn enough to make use of your full personal allowance. This is known as Marriage Allowance (MA) and applies to people of any age, but only if neither spouse is a higher rate taxpayer. The maximum that you can transfer to your spouse is £1,060.

Let’s see an example:

John and Naomi are both married and working but John only works part-time and is mostly a stay at home dad, so his annual earnings of £8,000 do not make full use of the personal allowance. He therefore decides to transfer his MA to Naomi, who earns £20,000.

Please note that the MA transfer does not increase Naomi’s personal allowance but provides her with a 20% tax reducer of the £,1060. In effect she gets a reducer against the tax liability of £212.

Next steps

If you want to understand how to implement this strategy or to discuss other finance/tax questions then please book some time with us using the below calendar:

If you are looking for a new accountant then please book some time with us using the below calendar. Please note that this booking is to describe our services and will not be used to discuss your personal tax affairs.



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Telephone: 0115 939 4606
Email: simon@optimiseaccountants.co.uk