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Where Taxpayers and Advisers Meet
.Gov.Fail: Have the New “Allowances” Foiled Even HMRC?
10/07/2016, by Lee Sharpe, Tax Articles - Income Tax
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TW Ed points out a quite bizarre bit of guidance on the new .GOV website


I recently gave a chat on the 2016 Budget to  roughly 40 accountants. As an aside, I asked for a show of hands on whether or not the audience thought that the new .GOV website was any good. I did not bother to count exactly how many thought it was pants. I did not need to.

There was one lone voice: a lady said she thought it was "quite useful". A crumb of comfort to HMRC, perhaps. But then, I am not so sure that HMRC is at all bothered by agents' opinion of the migration to the new website, (HMRC didn't ask for agent input, from memory) and in particular, the new guidance that attempts to summarise often complex tax matters in a few handy, bite-size paragraphs. I rarely bother to read such guidance now, having consigned it to the same mental compartment for HMRC's toolkits: great if you want to know what HMRC would like you to think is how tax rules in a particular area should work; or if you want to know what issues keep HMRC up at night. Otherwise... not so much. Anyhew, back to the new .GOV.guidance.

These New-Fangled "Allowances"

This will not be the first time that we have pointed out the deficiencies in these new so-called “Allowances”. Saving individuals from having to pay tax on relatively small amounts of investment income is a pretty good idea. But

  • They are NOT “Allowances”. They are, in effect, special “nil-rate bands”. That is a very important distinction from a tax perspective. Had Mr. Osborne or HMG been clearer from the outset, pretty much everybody else would have been happier. Or less confused, at least.
  • The legislation to implement these new Allowances is… …not ideal.

We recently pointed out that even Mr. Osborne seemed to be unable to grasp the tax implications of the new “Allowances”.

Unfortunately, it seems that HMRC has also caught the bug. Or whoever writes the .GOV website on HMRC's behalf.

A TW member was confused by the following on HMRC’s website about “Adjusted Net Incomes”. (A person’s “Adjusted Net Income” determines eligibility for the tax-free Personal Allowance, and for Child Benefit: if Adjusted Net Income is too high, they can be forfeit).

He posted the following query:

“If you Google "adjusted net income" it will take you to the Gov.Uk website with a very clear explanation of how to calculate Adjusted Net Income. However, I'm not sure the explanation is correct.

It states you can take off any tax reliefs and these include the Personal Savings Allowance and the Dividend Allowance if you've received any dividends. However none of the examples they give include these items nor does the Child Benefit Calculator include them.

Moreover to calculate an individual's PSA you need to establish their ANI but according to the site you have to deduct the PSA but how would you know how much to deduct?

Very confused! Can someone help?”

We followed the trail to the .GOV website, which held the following nugget:

How to Work Out Your Adjusted Net Income

Work out your adjusted net income by following steps 1 to 4 below.

Step 1 - Work Out Your ‘Net Income’

Add up your taxable income.

Include things like:

  • money you earn from employment (including any benefits you get from your job)
  • profits you make if you’re self-employed including from services you sell through websites or apps
  • some state benefits
  • most pensions (including the State Pension, company and personal pensions and retirement annuities )
  • interest on savings and pensioners bonds
  • dividends from company shares
  • some rental income
  • income from a trust 

Take off any tax reliefs that apply like:

  • payments made gross to pension schemes - those that have been made without tax relief
  • trading losses, for example trade loss relief or property loss relief*
  • personal savings allowance if you have savings interest and you are not an additional rate tax payer
  • dividends allowance for part of your income if you are paid dividends...


Since when did any “allowance” affect Adjusted Net Income? Referring back to ITA 2007, Adjusted Net Income derives from s58, which in turn refers to Step 2 of the calculation of Income Tax Liability (ITA 2007 s 23) – i.e., after the deduction of reliefs, NOT allowances. Even if the new “Dividend Allowance” and “Savings Allowance” were genuine allowances, they would feature in Step 3 of the calculation, after (Adjusted) Net Income is derived.

(*As an aside, when did general property losses count as “trading losses” that might influence Adjusted Net Income? Capital Allowances, or brought-forwards losses, maybe. I am all for simplicity. Just not when it makes cobblers.)

So are the new “Allowances” in fact reliefs deductible at Step 2? Nope. FB2016 Clauses 4 and 5 make quite clear that these are indeed new “nil rate bands” that will apply at Step 4 of the calculation of a person’s Income Tax liability, (back to ITA 2007 s 23), again, effectively after Adjusted Net Income has been derived.

We contacted HMRC to query this and, happily, received the following confirmation:

"You are correct - the Personal Savings Allowance and Dividend Allowance are 0% rate bands chargeable on specific types of income (savings and dividends), they have no effect on a person's Adjusted Net Income."

I have no doubt that HMRC is a bit tired of dealing with questions on the new Allowances although respondents remain as courteous as ever. It is to be hoped that HMRC will update its guidance promptly. There’s been enough confusion over these new “Allowances” already.

But in the interim, one has to ask how this guidance came about. Who, or what, wrote it? A tax practitioner, or an IT practitioner? Was it not checked? Even if you didn't know how these "allowances" were going to work at the time, how on Earth could you think they would affect the calculation of Adjusted Net Income? These are some of the kind of things that, unfortunately, keep me up at night.

The fact that HMRC was able to confirm its (correct) understanding of the position within 24 hours was some comfort. I harbour a suspicion (a hope, at least) that HMRC's input to some of these new ideas is unfortunately little, and late.

About The Author

Lee is TaxationWeb's Articles & News Editor and writes for TaxationWeb. He is a Chartered Tax Adviser with experience of advising individuals and owner-managed businesses over a broad spectrum of tax matters.
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