Understanding the Personal Allowance
Chris Campbell CA, ICAS Head of Tax, looks into the Income Tax Personal Allowance and the various rules to consider.
Most taxpayers in the UK will qualify for the Income Tax Personal Allowance. This is because it is normally available to taxpayers in the UK or UK nationals, but this depends on their income.
Section 56 Income Tax Act 2007 extends entitlement to the Personal Allowance to residents of European Economic Area, the Isle of Man or the Channel Islands. Taxpayers who were previously resident in the UK and now resident abroad for health reasons may also qualify and there are also special rules for those currently or previously employed in service of the Crown (or the widow/widower of such a person), those employed in the service of any territory under His Majesty’s protection and those employed in the service of a missionary society.
What’s important about the Personal Allowance?
The Personal Allowance is the amount of income you can receive without having to pay income tax.
The current Personal Allowance is £12,570. If someone has income below £12,570, the unused allowance is simply lost and they would have no income tax to pay. The Personal Allowance can only reduce income to nil – it cannot give negative income for tax purposes.
The Personal Allowance applies throughout the UK and is set by the UK government. Although Scotland can set its tax rates and bands and Wales has power over tax rates, everyone receives the same Personal Allowance regardless of where they live in the UK.
Transferring Personal Allowance to spouse or civil partner
If someone has income below the Personal Allowance, it may be possible to transfer 10% of the full allowance to their spouse or civil partner. This is known as Marriage Allowance and the taxpayer would make an election to HMRC to transfer part of their Personal Allowance to their spouse or civil partner.
A claim for marriage allowance will only be possible if the recipient spouse or civil partner pay tax at basic rate, which would mean their income would need to be between £12,571 and £50,270. For Scottish taxpayers, the recipient spouse or civil partner must pay income tax at the starter, basic or intermediate rate, which would mean their income would need to be between £12,571 and £43,662.
It’s important to remember that is necessary for a couple to be legally married or in a civil partnership – a couple who are merely cohabiting cannot transfer their Personal Allowance, regardless of the level of their income.
Reduction in Personal Allowance for taxpayers earning above £100,000
Since the 2010/11 tax year, there have been special rules which have withdrawn the Personal Allowance once taxpayers have adjusted net income of above £100,000. Adjusted net income is a taxpayer’s taxable income less trading losses, gross gift aid and pension contributions.
Very often taxpayers will consider making gift aid donations or pension contributions if their income is likely to be above £100,000, so that they can preserve their Personal Allowance.
The Personal Allowance is withdrawn by £1 for every £2 of income above £100,000. Based on the current Personal Allowance, this means that a taxpayer will have no Personal Allowance once their income receives £125,140. This means that they would be subject to income tax on all their taxable income.
Additional Personal Allowance for some taxpayers
Taxpayers who are registered blind can claim an additional Blind Person's Allowance. There’s also a separate Married Couple's Allowance (not to be confused with Marriage Allowance) for taxpayers who are married or in a civil partnership and one of the couple was born before 6 April 1935 – as this is a fixed date, the number of taxpayers who can claim this is likely to reduce over time.
If you have any questions regarding this article, please speak to your tutor.
