Personal Income Tax
Tax rates and allowances (Table A)
As announced a year ago, the standard personal allowance will increase in April 2012 by £630 to £8,105 – for a basic rate taxpayer, this represents a tax saving of £126 for the year 2012/13.
The benefit of the increased allowance is offset for anyone with income over £42,475 by a reduction in the higher rate income tax threshold from £35,000 to £34,370. Taxpayers will start to pay 40% tax once total income exceeds £42,475 (£8,105 + £34,370), the same total as in 2011/12 (£7,475 + £35,000). This means that the saving remains £126 for all taxpayers with income up to £100,000. Above that level, the withdrawal of personal allowances means that the reduction in the higher rate threshold produces an overall tax increase of up to £252.
The following are unchanged:
- Withdrawal of personal allowances produces a marginal tax rate of 60% in the band between £100,000 and £116,210.
- Additional rate of 50% for income above £150,000.
- Dividends are grossed up by a notional tax credit of 10/90 and then taxed at 10%, 32.5% and 42.5% (depending on the taxpayer’s level of total income) less a 10% credit.
Future allowances and rates
The personal allowance for 2013/14 has been announced in advance – a further above-inflation increase to £9,205. This brings closer the Coalition Government’s objective of raising the allowance to £10,000, removing many lower-paid people from tax altogether.This will again be balanced by a further reduction in the higher rate threshold to £32,245, bringing more people into the 40% rate and the increased likelihood that they will need to file self-assessment tax returns.
The Chancellor also made the controversial announcement that the 50% tax rate will be reduced to 45% from April 2013 (with the additional dividend rate falling from 42.5% to 37.5%). He argued that it has promoted tax avoidance and has raised far less revenue than Labour predicted when they introduced it; he claimed that cutting the rate will encourage enterprise. The Opposition predictably seized on the announcement as a ‘tax cut for millionaires’ and ‘the end of “we’re all in this together”’.
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| If you are a 50% taxpayer, consider deferring income into 2013/14 |
Age-related allowances
For many years, people reaching the age of 65 in a tax year have enjoyed an increased personal allowance, provided that their income is not higher than a set figure. The Chancellor said that this is complicated and poorly understood by those it affects, and requires many of them to complete self-assessment tax returns. Accordingly, the higher allowances will be frozen from 6 April 2013 at their 2012/13 levels; only those who are already 65 by that date will be entitled to age allowance, and only those who are already 75 will be entitled to the top rate. When the ordinary personal allowance has reached the same levels (currently £10,500 and £10,660), the age allowances will be abolished.
What this means is that existing pensioners will not see any actual reduction in their allowances, but will not see an increase either for the next few years.
Foreign domiciled people
Since 2008/09, a long-term UK-resident but non-UK domiciled individual who claims the benefit of the ‘remittance basis of taxation’ (only paying tax on foreign income and gains if the money is brought into the UK) has had to pay a flat rate charge of £30,000 (unless their foreign income and gains are no more than £2,000). This has applied to anyone who has been UK resident for 7 of the previous 9 years. As announced last year, the flat rate tax charge will rise in 2012/13 to £50,000 for those who have been resident in the UK for 12 of the previous 14 years.