The Tax-Free Personal Allowance

Generally speaking, all UK resident individuals and British nationals are entitled to an ‘income tax personal allowance’.  This refers to the amount of income that can be received each year ‘tax-free’.  Effectively, the allowance is deducted from net income and saves tax at the highest tax rate.

The amount of personal allowance that can be claimed depends on age and the total income in the tax year (these are discussed in more detail below).  The three levels of personal allowance are set out below.

Personal Allowance	2013-14 tax year	Income limit
Basic	£9,440	£100,000
Age 65-74	£10,500	£26,100
Age 75 and over	£10,660	£26,100

Age related allowances

For individuals aged 65 or over at the end of the tax year a higher personal allowance is available of £10,500, rising to £10,660 where individuals have reached the age of 75 at the tax year end.

If a taxpayers ‘adjusted net income’ (total income less gift aid donations, pension contributions, trading losses etc) is over £26,100, but less than £100,000, the age-related personal allowance is reduced by £1 for every £2 of income exceeding the £26,100 income limit, until the basic allowance is reached.  For example, an individual aged 66 with adjusted net income of £26,700 (£600 over the limit) will be entitled to claim a reduced age-related allowance of £10,200 (£10,500 less £300).

Higher Earners

If a taxpayers ‘adjusted net income’ is over £100,000, the personal allowance is reduced by £1 for every £2 of income exceeding the £100,000 limit.  Unlike the above, if a taxpayers income is large enough, the personal allowance will be reduced to ‘nil’ i.e. income in excess of £118,880.

The £100,000 income limit applies irrespective of age.

Who is not entitled to the Personal Allowance?

Taxpayers who are non-UK domiciled, claiming the special 'remittance' basis of tax (thereby opting to be taxed on only the income brought into the UK) cannot claim the personal allowance.

With structured tax planning, steps can be taken in order to help preserve the amount of personal allowance a taxpayer can claim each year.  If you feel that you are affected by the above, please contact a member of Ward Williams’ tax department for further advice: www.wardwilliams.co.uk