In addition to the current tax free allowances, (£11,500 personal, £5,000 dividend and personal savings of up to £1,000), HMRC will be introducing two further tax free allowances starting from 6 April 2017;
- A new £1,000 tax free allowance for self-employed income
- A new £1,000 tax free allowance for rental income
These new allowances mean that individuals doing a small amount of self-employed work or receiving a small amount of rental income may fall outside of self-assessment. As a result, HMRC may not require the completion of a tax return.
The £1,000 allowances are the gross amounts that will be tax free each year. Where the gross income exceeds £1,000, there will be the choice of paying tax on the excess over £1,000 or deducting allowable expenses in the normal way.
Mr Hemme is employed full time, but also has a rental business earning £1,500 a year with £800 of expenses. Rather than paying tax on the net profit of £700, the new system will allow him to deduct the £1,000 of his income, meaning he will only be taxed on £500 (£1,500 less £1,000). If his gross income was below £1,000, it would be tax free and would not need to be reported to HMRC.
If his expenses total to £1,200, he would therefore use the existing system, deducting expenses from income. This would result in £300 profit being taxed (£1,500 less £1,200).
If you would like discuss the new personal allowances and how they could affect you, get in touch with one of the team.
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