Personal allowances
So what is a personal allowance? It’s an amount announced
towards the end of each year in the Chancellor’s Pre-budget Report
(but to take effect from the following 6 April) which reduces the
level of income you pay tax on. Another way of looking at it is to
say that you get a certain amount of tax-free income each year
before you start paying any tax.
Nearly everyone who lives in the UK gets a personal allowance,
as do some people from other countries who are living here and most
UK nationals living abroad.
The personal allowance is £8,105 for 2012/2013 (£9,205 for
2013/2014) for those under 65 throughout that year. This
allowance is reduced where the income is above £100,000 - by £1 for
every £2 of income above the £100,000 limit. This reduction applies
irrespective of age.
The allowance is increased in the tax year of your 65th
birthday, depending on age and income level.
Between 65-74 years of age, the allowance is £10,500 for
2012/2013, rising to £10,660 for someone 75 and over. See
below for the changes occurring in 2013/2014.
If you are an employee or pensioner who is taxed under Pay as you Earn (PAYE), your personal allowance
will be spread throughout the year by your employer or pension
payer. Depending on how you are paid, you will either get 1/52 of
your personal allowance if you are paid weekly or 1/12 if you are
paid monthly, as tax-free pay every pay day. The amount you get
above this level is then taxed at the 20% basic rate and/or the 40%
higher rate.
For a self-employed person, the allowances are included in the
self-assessment calculation when they complete their tax
return.
Back to top
Example
Sam aged 45 has income of £12,940 for 2012/13. He is not married
and has no other income.
Sam's taxable income will be:
Income £12,940
Less: Allowance £8,105
Sam pays tax on £4,835
Back to top
Back to first page
Blind Person's Allowance
Blind Person's Allowance (BPA) is an allowance
of £2,100 for 2012/2013. It reduces the amount of income that you
will pay tax on, and is given in addition to the personal
allowance. Unlike the personal allowance, you have to make a claim
for it.
You do not have to be entirely without sight
to claim the BPA.
You can claim if you are registered as blind
with a local authority in England and Wales. For people living in
Scotland or Northern Ireland, your sight must be so bad as to stop
you performing any work for which eyesight is essential.
If you are already seeing an eye specialist,
they will check your sight and, if appropriate, certify that you
are blind. You can ask your GP to refer you to an eye
specialist.
Social services should then contact you to see
if you want to be added to the register, and if you do, then the
date that the consultant signed your certification form is the date
of registration.
Once you are registered, contact your tax
office (or your local tax office if you do not have one), as soon
as possible and tell them that you want to claim BPA. You can find
your local tax office address on the HM
Revenue and Customs website (link opens in a new
window).
If in the previous tax year, you obtained
evidence of blindness on which the registration will be eventually
made, but you only registered the following tax year, you can claim
the relief for both years.
If both you and your husband or wife or civil
partner are entitled to claim BPA, you can each claim
independently.
You can transfer any surplus BPA to your
husband or wife or civil partner to reduce his or her
tax.
If you are a non-taxpayer and your spouse or
civil partner pays tax, you can still transfer your BPA to
them.
Back to
top
Example
Pete is aged 35 and is married to Sarah aged
30. Sarah works and her salary is £10,000 for 2012/2013 whereas
Pete's income before allowances for 2011/12 is £4,500, which is
less than his personal allowance of £8,105. Pete claims BPA and
therefore £2,100 can be transferred to Sarah, reducing the income
that is charged to tax for 2012/2013.
Back to top
Back to first page
Tax allowances for people aged 65 and over
Higher personal allowance
You will get a basic personal allowance unless
your income is greater than £100,000. A personal allowance reduces
the amount of income that you pay tax on. Another way of looking at
it is to say that you get a certain amount of tax free income each
year before you start paying any tax.
The personal allowance is £8,105 in 2012/2013
(£9,205 for 2013/2014) for those under 65 throughout that
year. The allowance is increased for those people who are 65 and
over at some point during the tax year, depending on their age and
income level.
Between 65 and 74 the full personal allowance
(also called age allowance or higher personal allowance) is £10,500
in 2012/2013, rising to £10,660 for someone 75 and over. You can
find more information on the amounts of tax allowances for the
current and earlier years on the HM
Revenue & Customs website (link opens in a new
window).
Changes to the higher personal allowance for 2013/2014 and
later years
In the 2012 Budget, the Government announced changes to personal
allowances to take place with effect from the 2013/2014 tax year
starting 6 April 2013:
- People born after 5 April 1938 but before 6 April 1948 will be
entitled to a personal allowance of £10,500
- People born before 6 April 1938 will be entitled to a personal
allowance of £10,660.
What this actually means for existing pensioners is that there
will be no annual increase in their personal allowances for
2013/2014.
For 2013/2014, people born after 5 April 1948 will be entitled
to a personal allowance of £9,205. In the past, they would have
been entitled to the higher personal allowance from the year in
which they became 65.
Back to top
Example
Maggie aged 70 has income of £13,940 for
2012/2013. She is not married and has no other income.
Maggie's taxable income will be:
Income £13,940
Less: Allowance £10,500
Maggie pays tax on £3,440
Married Couple's Allowance
There is a further allowance that is similar
to the personal allowance, called the Married Couple's Allowance,
but this does not come off your income in the same way. It reduces
your tax bill instead. For more information and see the section on
Married Couple’s Allowance(link opens in a new window) on the
Low Income Tax Reform Group website.
Back to top
How does higher income reduce my personal allowances?
If your income before any allowances is more
than £25,400, the situation gets more complicated. When we talk
about income in this section we mean your income before allowances
so the figure of £25,400 will include the income you received and
the tax taken off before you get it.
However, your income for working out the
amount of your higher personal allowance is reduced by the gross
amount of any Gift Aid payments you make. The amount donated to the
charity is treated as having been paid after deduction of basic
rate income tax at 20%.
The gross amount you deduct from your income
is the net amount you actually pay to the charity plus the 20% tax
taken off. An easy way to work out what this 20% tax figure will be
is simply to divide the net payment you make by four.
Back to top
Example
Brian aged 83 has income for 2012/2013
of:
State Retirement Pension £5,500 (no tax taken
off)
Occupational pension (PAYE) £6,000 (£5,300
after tax)
Bank interest £6,000 (£4,800 after tax)
Brian's income will be: £5,500 + £6,000+£6,000
= £17,500
Brian gets the full allowance for his age
of £10,660 as his income is below £25,400.
You can only keep all of the higher personal
allowance if your income is below set levels. If your income for
2012/2013 is over £30,190 for someone aged 65-74
(over £30,510 for someone 75 or over), your personal allowance
will be the basic allowance (£8,105) that everyone gets.
Back to top
Example
Mick aged 69 received income of £32,000 for
2012/2013. His personal allowance will be the basic allowance of
£8,105.
If your income falls between £25,400 and
either £30,190 or £30,510(for someone 75 or over) for
2012/2013, your age allowance of £10,500 or £10,660 will be reduced
but never to below the basic allowance of £8,105.
Back to top
Example
Jon aged 78 received income of £27,400 for
2012/2013. He will be entitled to more than the basic allowance of
£8,105 but less than the full age allowance of £10,660. The easiest
way to see how it works is to follow these steps:
Jon has income of £27,400
(i) From this figure deduct £25,400 (the
upper limit for getting the full higher allowance), giving you the
amount that you have exceeded the
limit.
Income before allowances £27,400
Limit £25,400
Difference £2,000
(ii) Divide the difference worked out
above by two.
Amount over limit £600
Divided by two £300
(iii) Take the figure you get from the full
allowance of £10,500 or £10,660 to give you your allowance for the
year.
Jon's allowance £10,660
Less: reduction worked out above £1,000
Allowance Jon receives £9,660
If Jon had been under 75, the situation is
exactly the same except that the full allowance would be £10,500
instead of £10,660.
In 2012/2013, if your income before allowances
falls within the band £25,400 to £30,190 (£30,510 for those 75 or
over), you can end up paying an effective rate of tax up to 30% on
your income between these two limits. You may like to see if a
change to tax-free investments could lower your tax bill while
leaving your income after tax the same.
Back to top
What other tax allowances are there for pensioners?
The main allowance we will be looking at is
Married Couple's Allowance. There is also an allowance for certain
payments following marriage break-up - maintenance
payments.
For more information and examples on these two
tax allowances, see the section on Maintenance
(link opens in a new window) on the Low Income Tax Reform Group
website.
Back to top
Back to first page
Turn2us - to access benefits & grants.
