Tax allowances for people aged 65 and over
What is the 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 £7,475 for 2011/12 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 £9,940 for 2011/12,
rising to £10,090 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).
Example
Maggie aged 70 has income of £13,940 for 2011/12. She is not
married and has no other income.
Maggie's taxable income will be:
Income £13,940
Less: Allowance £9,940
Maggie pays tax on £4,000
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.
How does higher income reduce my personal allowances?
If your income before any allowances is more than £24,000, the
situation gets more complicated. When we talk about income in this
section we mean your income before allowances so the figure of
£24,000 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.
Example
Brian aged 83 has income for 2011/12 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 £10,090 as his
income is below £24,000.
You can only keep all of the higher personal allowance if your
income is below set levels. If your income for 2011/12 is over
£28,930 for someone aged 65-74 (over £29,230 for someone 75 or
over), your personal allowance will be the basic allowance (£7,475)
that everyone gets.
Example
Mick aged 69 received income of £30,000 for 2011/12. His
personal allowance will be the basic allowance of £7,475.
If your income falls between £24,000 and either £28,930 or
£29,230 (for someone 75 or over) for 2011/12, your age
allowance of £9,940 or £10,090 will be reduced but never to below
the basic allowance of £7,475.
Example
Jon aged 78 received income of £26,000 for 2011/12. He will be
entitled to more than the basic allowance of £7,475 but less than
the full age allowance of £10,090. The easiest way to see how it
works is to follow these steps:
Jon has income of £26,000
(i) From this figure deduct £24,000 (the upper limit for
getting the full higher allowance), giving you the amount that you
have exceeded the
limit.
Income before allowances £26,000
Limit £24,000
Difference £2,000
(ii) Divide the difference worked out above by two.
Amount over limit £2,000
Divided by two £1,000
(iii) Take the figure you get from the full allowance of £9,940
or £10,090 to give you your allowance for the year.
Jon's allowance £10,090
Less: reduction worked out above £1,000
Allowance Jon receives £9,090
If Jon had been under 75, the situation is exactly the same
except that the full allowance would be £9,940 instead of
£10,090.
In 2011/12, if your income before allowances falls within the
band £24,000 to £28,930 (£29,230 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.
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 sections on
Married Couple’s Allowance (link opens in a new window) and
Maintenance (link opens in a new window) on the Low Income Tax
Reform Group website.
Other sections in this information sheet:
Last updated: 6 April 2011
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