The vast majority of UK taxpayers living in the country on a regular basis are entitled to a personal allowance – a level of income that may be earned without incurring any tax liability. In 2011/12, this is £7,475 for taxpayers under the age of 65, an increase over the rate of £6,475 in 2010/11.
The allowance is subject to an income ceiling of £100,000. If the adjusted net income exceeds that figure, the Personal Allowance is reduced by £1 for every £2 of additional income. Different rates, the age related allowances, and a different ceiling apply to taxpayers over the age of 65.
The Personal Allowance should be paid automatically for most taxpayers. If you are receiving a salary or an occupational pension, the allowance will be calculated weekly or monthly as part of your Pay As You Earn calculation. The allowance will be taken into account, along with any other relief to which you are entitled, and the salary you receive above the allowance taxed at the appropriate rate or rates.
The PAYE system
The PAYE system has the advantage here that the taxpayer has the allowance distributed across the entire year and is thus paying only that tax due on the taxable part of the income.
The Personal Allowance is applied to all UK taxpayers apart from those who are outside the country and claiming a special remittance tax basis. In this, the taxpayer pays only on income remitted to the UK.
If, for some reason, you have not claimed the Personal Allowance, or it has not been automatically calculated as part of your PAYE, you may claim a tax refund. This must be done within five years of the January 1 which follows the end of the tax year to which the claim relates.
Personal Tax Allowance Calculation
The Personal Allowance is calculated as follows:
Suppose you earn £110,000 per year and you are under 65. Your basic Personal Allowance is £7,475. Your income is over the £100,000 ceiling, so the allowance will be reduced by £1 for every £2 in excess. The excess is £10,000 so your Personal Allowance is reduced by £5,000, leaving you an adjusted Personal Allowance of £2,475.
If your income is below the ceiling, your Personal Allowance will always be the full £7,475.
If you pay tax on your income and thus are entitled to claim a Personal Alliance but are not receiving it, you should talk to your tax office.
There are a number of other allowances applicable, such as the Blind Person’s Allowance, the Age Related Allowances and the Married Couple’s Allowance, but the Personal Allowance is the only one of these that is universally applicable, subject to the income ceiling.
You might like to think of it as the Treasury’s way of letting you think you’re getting something for nothing before they extract money from you pocket in all kinds of more subtle ways.