Personal Tax Allowance

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.

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”