Tax free income
Written by Ray Coman
In an economy where tax seems apparent at every turn, it may come as some refreshment to learn than some types of income are entire free of tax. Some of the most commonly encountered forms of tax free income include the following:
- Damages paid for personal injury claims, and any interest thereon.
- Most typical types of payment from insurance companies which are not business related. These include payments from policies against accident, sickness, disability, infirmity or unemployment.
- Interest paid by HMRC on overpayments of income tax, capital gains tax and VAT. Interest paid on overpaid corporation tax is itself subject to corporation tax.
- Scholarship income. However, a scholarship paid by an employer to the parent of the child who benefits is not likely to be exempt. Scholarships towards a course run by an employer are not likely to be exempt, as the training provider would not be considered an 'education establishment'.
- Many social security benefits. The most common types of exempt benefits are child benefit and housing benefit. Child tax credit and working tax credit are also tax exempt. The most common types of taxable benefits include state pension and job seekers allowance.
- Pension income resulting from retirement due to work related illness or disablement, such as a war injury. The exempt amount is only what is in excess of the pension that would otherwise have been paid.
- Gifts and betting or gambling winnings. This includes winnings on the national lottery and premium bonds.
- NS&I (National Savings and Investments) Certificates. Fixed rate and indexed linked certificates are tax free. However interest from an NS&I account may be taxable.
- Interest and dividends from ISA investment. Up to £5,760 for the tax year can be saved in a cash ISA, and up to £11,520 overall. Therefore, any remaining allowance after investment in a cash ISA can be placed in a stocks and shares ISA. The quoted allowances are applicable for the 2013-14 tax year.
Often is the case that you would have paid the correct amount of tax, or even too little tax on your income. However, there are forms of tax free income and other reasons that your tax liability may be lower than expected. Please contact us for a consultation on your requirements.