Age Related Tax Allowance

Most UK taxpayers are given a Personal Allowance, an amount of annual income they are allowed to earn tax-free. For taxpayers under the age of 65, the basic allowance is £7,475. If the income after adjustments is greater than £100,000, the allowance is reduced by £1 for every £2 greater than £100,000.

Your personal tax allowance increases once you reach the age of 65 to £9,940. However, while with one hand graciously increasing the allowance, with the other hand the government lowers the ceiling for the adjusted income to £24,000, and the allowance is again reduced by £1 for every £2 in excess of that figure.

Thus for a 65-year old with an adjusted net income of £36,000, the allowance is reduced by £6,000 to leave £3,940.

At the age of 75, the Personal Allowance increases again to £10.090, again with an income limit of £24.000 after which it is again reduced by £1 for every £2 in excess.

Inform HMRC

In some cases, HM Revenue and Customs may not be aware of the taxpayer’s age, so it is important to notify them on reaching the age of 65, so that the allowance is increased appropriately. This should be done using the Pension Coding form P161. This allows HMRC to calculate what allowances you are entitled to and so whether you should be paying tax, an how much, when your pension income begins. If you don’t return it, you could be overcharged.

The Personal Allowance has been raised in the 2011/12 tax year from £6,475 to £7,475 for taxpayers under the age of 65 and from £9,640 to £9,940 for those over 75. The amount of the age related tax allowance for taxpayers between 65 and 74 remains unchanged. In both the older age groups, the income limit has been raised from £22,900 to £24,000.

The adjusted net income is the total income from all sources adjusted to take deductible allowances into account. Capital gains are not included, because they are taxed separately. There is no provision for personal allowance to be used to offset capital gains.
The age band becomes applicable at the beginning of the tax year in which the taxpayer attains the age of 65 or 75.

Calculation and Restrictions of Age Related Tax Allowance

In order to work out the amount of the age related allowance to which you are entitled, simply add up all your taxable income then subtract all tax-free allowances to arrive at the adjusted net income. If it is under £24,000, then the full allowance for the appropriate age band applies. If it is over that figure, then you should reduce the allowance by £1 for every £2 by which it is over.

The age related allowance is not payable to taxpayers who are living outside the UK and claiming the special remittance basis for tax, in which tax is only paid on the portion of the income brought into the UK.

There is little that can be done to reduce the effect of the somewhat low income ceiling for a taxpayer who is receiving a fixed income from a pension scheme. One option is to continue making contributions to a personal pension. 

”I strongly object to the Governments proposal toscrap the old age allowance tax relief and hope this proposal will be put backto the commons for further debate”