Personal Tax 2. Taxable Income

NON-SAVINGS INCOME is all income other than interest and dividends.

The two main sources of non-savings income in the Personal Tax assessment are employment income and property income which we will cover in detail in later chapters of this Text.

Other types of non-savings income include:

Trading income: where an individual carries on a business as a sole trader or partner (dealt with in detail in Business Tax) 

Pension income 

SAVINGS INCOME is interest income. Interest can either be received gross or net

Examples of types of interest which are received gross (with no tax deducted at source) are: 

Interest on National Savings and Investments (NS&I) Direct Saver and Investment Accounts 

Interest on government securities (these are also called 'gilts') such as Exchequer Stock and Treasury Stock 

DIVIDEND INCOME is dividends received from a company in which the taxpayer owns shares. Dividends are always received net of a 10% tax credit and therefore must be grossed up by multiplying the NET dividend received by 100/90 to give the GROSS dividend. It is this gross dividend which appears in the income tax computation. 

Individual savings account (ISA)/ new individual savings account (NISA)

NS&I Savings Certificates

Other exempt income Other exempt income includes:

Damages for personal injury or death

Scholarships and educational grants (exempt as income of the student – if paid by a parent's employer, a scholarship may be taxable income of the parent)

Prizes, lotto winnings, gambling winnings

Premium Bond prizes

There is also a special rule relating to the calculation of the personal allowance where, during the tax year, the taxpayer has made:

(a) A Gift Aid donation, and/or

(b) A contribution to a personal pension scheme

The rule is that, for the purposes of comparing net income with the income limit of £100,000, the net income is reduced by the gross amount of the Gift Aid donations and personal pension contributions.

This amount is known as the adjusted net income.

Note that this rule only applies when calculating the personal allowance.

A person who was born between 6 April 1938 and 5 April 1948 is entitled to an age allowance of £10,500 instead of the personal allowance of £10,000.

A person who was born before 6 April 1938 receives a higher age allowance of £10,660 instead of the personal allowance of £10,000.

If the individual's net income exceeds £27,000, the age allowance is reduced by £1 for each £2 by which net income exceeds £27,000.

The age allowance cannot however be reduced below £10,000 (unless net income is above £100,000, then the restriction above also applies).

The special rule which allows net income to be reduced by the gross amount of Gift Aid donations and personal pension contributions also applies in the calculation of the age allowance. 

There are three types of income: non-savings, savings and dividend 

Non-savings income includes employment income, property income, trading income and pension income  Savings income is interest received 

If an individual receives interest net of 20% tax it must be grossed up by multiplying by 100/80 

Dividends are received net of a 10% tax credit. Dividends are grossed up by multiplying by 100/90 

Exempt income includes income from (new) individual savings accounts ((N)ISAs), NS&I Savings Certificates and gambling winnings 

Tax computations must be prepared for a tax year 

All the components of an individual's income are added together to arrive at 'net income' 

Net income less the personal allowance or age allowance gives 'taxable income' 

The personal allowance is deducted first from non-savings income, then from savings income and finally from dividend income. It is reduced by £1 for every £2 that the individual's net income exceeds the income limit of £100,000 

The age allowance is given to individuals born before 6 April 1948. It is reduced by £1 for every £2 that the individual's net income exceeds the income limit of £27,000, but cannot be less than the personal allowance 

The net income figure for comparison to the income limit for the personal allowance and the age allowance is reduced by gross Gift Aid donations and personal pension contributions