Understanding 'Tax-Free' Income Type in Timeline Planning

Summary

Tax-free income is treated as non-taxable income in Timeline Planning.
It does not count toward income tax calculations or tax bands.
Can be assigned to an individual or set as a joint income source.
Option to adjust the income for inflation using CPI.

Description

Tax-free income in Timeline Planning allows advisers to model income that is not subject to income tax. This helps ensure a client’s financial plan reflects their true net income without affecting tax calculations.

Tax-free Income Explained

Tax-free income represents payments that are not subject to income tax. Unlike employment income, pensions, or dividends, this income is excluded from taxable income calculations.

When creating a Tax-free income source, you can select the owner of the income, assigning it to an individual or as a joint income source within the financial plan.

Taxation

Tax-free income is not subject to income tax in Timeline Planning.

This means:

It does not use the personal allowance.
It does not contribute to income tax bands.
The full amount is treated as net income within the financial plan.

Adjustments

Tax-free income can be adjusted for inflation, helping maintain its real value over time in long-term projections.

Example

John receives £8,000 per year from a tax-free source.

Annual Amount: £8,000
Income tax applied: £0
Net income received: £8,000

The full amount is available within the financial plan without affecting taxable income.

Conclusion

Tax-free income allows advisers to accurately model non-taxable payments, ensuring financial plans reflect a client’s true net income.