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Personal Taxation – Budget Update
Wednesday, March 21st, 2012
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2012/13
As previously announced, lower personal income tax allowance for those aged under 65 will increase by £630 from £7,475 to £8,105 from this April, equally, there will be a corresponding reduction in the income tax basic rate limit down to £34,370. The result being that, unlike the situation at the beginning of this current tax year, higher rate tax payers will derive some benefit from the increase in the personal allowance, but only at basic rate tax rather than their marginal rate of tax.
2013/14
However, in line with Government policy to increase the personal allowance to £10,000 by the end of this parliament, the lower personal allowance will increase to £9,205 in 2013/14, an increase of £1,100 or 110 points on a tax code.
For 2013-14, the main rates of income tax will be:
- 20 per cent basic rate,
- 40 per cent higher rate and
- As very widely predicted, the additional rate will be reduced from 50% in 2012/13 to 45%.
As with this current year and next year, it came as no surprise that for 2013/14 the basic rate limit would be reduced, yet again, this time to £32,245 thereby ensuring higher rate tax payers do not benefit from the increase in the personal allowance at their marginal rate of tax.
Also announced was that the Class 1 National Insurance Upper Earnings Limit will be realigned with the point at which the higher rate tax becomes payable (£41,450).
Age Allowances
What came as a surprise was the announcement that, from 2013-14, the age-related personal allowances will not be increased and their availability will be restricted to people born on or before:
- 5 April 1948 for the allowance worth £10,500; and
- 5 April 1938 for the allowance worth £10,660.
This so called “age allowances” will remain static until the lower personal allowance increases and meets the age allowances. People born on or after 6 April 1948 will be entitled to the personal allowance of £9,205 for 2013-14. This meets the Government’s policy objectives of a single personal allowance for all tax payers regardless of age. As with those earning in excess of £100,000, there is currently an income limit on the age allowance for those earning in excess of £25,400 (2012/13) whereby the tax payer loses £1 for every £2 their income exceeds the £25,400 figure until the allowance equals the lower personal allowance. This means that the age allowance will be completely lost for someone who is 65 when their adjusted net income reaches £27,990 for 2013/14.
This measure will, therefore have the greatest impact on those earning in excess of £34,605 (Personal Allowance of £9,205 plus the Age Allowance restriction threshold of £25,400). The Government believe this impact will be minimal.
We will be exploring this in more detail in next week’s newsletter
Cap on unlimited tax reliefs
Legislation will be introduced in Finance Bill 2013 to apply a cap on income tax reliefs claimed by individuals from 6 April 2013. The cap will apply only to reliefs which are currently unlimited. For anyone seeking to claim more than £50,000 in reliefs, a cap will be set at 25 per cent of income (or £50,000, whichever is greater) Draft legislation will be published for consultation later this year.
