How Well Do You Know Your Personal Allowance?

July 12th, 2009

When working out your Income Tax liability, account is taken of your personal allowance.  A personal allowance applies no matter what age you are.  For the 2009/10 tax year, the personal allowance for people aged below 65 is £6,475.  It increases with age so that for people aged between 65 and 74 it is £9,490 and for those aged 75 and above it is £9,640.

Income within the relevant personal allowance is not taxed.  Any unused personal allowance cannot be carried forward to another tax year, or transferred to another person – any unused allowance is therefore lost.  There are a number of other interesting facts regarding the personal allowance.

The relevant allowance is that applying to the age you have attained in the year of assessment, as it is not calculated on a pro-rata basis.  So, for instance, if you attain age 65 on 1st June 2009 you will be entitled to the full age allowance of £9,490 for the tax year 2009/10.

If you are aged between 65 and 74 then the full allowance can be claimed if your total income is not greater than £22,900.  For every £2 of your income in excess of this amount, your personal age allowance is reduced by £1.  However, it will never be reduced to less than the basic personal allowance of £6,475.  Once your income is in excess of £28, 930 then you will only be entitled to the basic personal allowance.

If you are aged 75 or over then the full allowance can be claimed if your total income is no greater than £22,900.  Again, if your income is in excess of £22,900 then your personal age allowance is reduced by £1 for every £2 excess, but it can never be less than the basic allowance of £6,475.  If your income is in excess of £29,230, you will only be entitled to the basic personal allowance.

The relevant age allowance is given even if you die before your 65th or 75th birthday that would have occurred in that tax year.  The amount of allowance is given in full, i.e. there is no deduction for the period from date of death to the following 5th April.

If you have a sufficient level of income to lose part, or all of your age allowance there are a couple of strategies you could consider taking to try to improve the position:

Using Independent Taxation

This could be considered if you have a spouse who is also entitled to an age allowance, but has income below the £22,900 threshold.  If this is the case, then it could be advantageous to consider transferring income-producing investments into your spouse’s name so that you both remain below the threshold and can take advantage of the higher age allowance.  This could also be considered if your spouse is only eligible for the basic personal allowance of £6,475, but does not earn enough income to utilise this to the full.

To be effective, any transfer of assets between spouses must be outright and unconditional.  This means that you must be happy to transfer some of your assets to your spouse as once transferred they will belong to your spouse and you will not have control over those assets.  If this is a concern, you could consider placing the assets into joint names so that some control is maintained.  In this case, any income will normally be divided between the two of you on a 50:50 basis.

Using Investment Products

If independent tax planning strategies will not be of assistance, perhaps because your spouse also receives income to utilise their personal allowance, or you do not wish to transfer assets, then it may be worth considering restructuring the investments that are producing the income to reduce your allowance.

An example of this is if you have interest being earned from money held in a bank or building society account.  Here, you could consider transferring it to an Individual Savings Account (ISA) so that the interest earned is placed in a tax-sheltered environment.  Because an ISA produces tax-free income and capital gains, income arising from the investment would no longer affect the calculation of the age allowance.

Another possible investment is a single premium bond as this is a non-income producing asset and therefore no income would be produced to affect the age allowance.  It is possible to receive monies from the investment by taking a 5% tax deferred withdrawal of capital from the bond every year for 20 years.  This 5% of the initial investment can be enjoyed each year, for 20 years, untaxed at the time they are drawn, without loss of age allowance, with the result that overall levels of net spendable income could be increased.

Care needs to be taken however, as any amount withdrawn over the 5% initial investment limit would count as income and be included when considering the age allowance.  Also, on full encashment of the policy the 5% withdrawals taken from the policy will be taken into account and there could be a chargeable event gain.  This chargeable event gain will be taken into account in full for age allowance purposes, without any adjustment.  However, careful planning could alleviate this problem.

It is also important, when restructuring your assets to take account of any Capital Gains Tax liability that may occur.  It is therefore important that you seek appropriate advice before any action is taken to ensure there are no adverse consequences to any steps you may take.

The value of your investment can go down as well as up and you may not get back the full amount invested. Investments in stocks and shares do not have the same degree of capital security, which is afforded with a deposit account. The levels and basis of, and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.