One of the financial perks of older age has long been a higher personal allowance for income tax.
In the 2012/13 tax year, over 65s have received a personal allowance of £10,500, better than the £8,105 the younger among us get.
A bigger personal allowance means more pension and savings income is free from tax, making your net income stretch a little further.
The start of the new tax year on 6th April 2013 sees the start of what many dubbed a ‘granny tax’; the phased equalisation of the personal allowance.
This simplification of the tax system means those who reach age 65 before 6th April 2013 will get a slightly higher personal allowance than they did before.
For others who attain age 65 on or after 6th April 2013, it will be the same personal allowance as before, at £9,440 for those born after 5th April 1948.
The personal allowance of £10,500 for 2012/13, available to people aged 65 to 74, will be restricted to people born after 5th April 1938 but before 6th April 1948 and will be frozen at this level for 2013/14.
The personal allowance of £10,660 for 2012/13, available to people aged 75 and over will be restricted to people born before 6 April 1938 and also frozen at this level for 2013/14.
So, for the 2013/14 tax year at least, ‘simplification’ of the tax system means one personal allowance for those born after 5th April 1948, one for those born after 5th April 1938 but before 6th April 1948 and one for people born before 6th April 1938.
We do get to a position of simplification in time, but certainly not during this tax year.
In 2013/14 the age related personal allowances still get reduced for those earning above the income limit, set at £26,100 from 6th April.
The age-related personal allowance is reduced by £1 for every £2 over the £26,100 income limit, until the ordinary personal allowance of £9,440 is reached.
If you earn over £100,000 in 2013/14, your basic personal allowance is reduced by £1 for every £2 earned over £100,000, and it can be reduced to nil if your income is large enough (£118,880 in 2013/14).
They say that tax doesn’t have to be taxing. When it comes to understanding your personal allowance and how it is reduced by earnings and other investment events, it certainly can be taxing.
Speak to a professional adviser, particularly before surrendering an Investment Bond, to make sure you are not losing your age related personal allowance and paying more income tax than necessary.
Photo credit: Flickr/weenah3
