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Income tax personal allowances: the facts

Author Image The Technical Team
10 minutes read
Last updated on 6th Apr 2018

Overview

What you need to know about the income tax personal allowance.

Key points

  • The personal allowance in 2018/19 is £11,850
  • The personal allowance is deducted from net income to save tax at the highest rate
  • Certain married couples and civil partners will be entitled to marriage allowance
  • The personal allowance is gradually withdrawn for individuals with adjusted net income above £100,000
  • The availability of married couple’s allowance requires at least one spouse to be born before 6 April 1935

What is the personal allowance?

The personal allowance is the level above which income tax is levied on an individual's annual income. The personal allowance and blind person's allowance are deducted from net income to save tax at the highest rate.

For those taxed under Pay As You Earn (PAYE), generally the benefit of the personal allowance is spread throughout the year. For a self-employed person, the personal allowance is taken into account through their self-assessment tax return when the tax bill for the year is worked out.

Note that the Scottish Parliament has the power to set the Scottish rate of income tax (SRIT) which applies to non-savings and non-dividend income. This comprises earnings, pensions, taxable social security payments, trading profits and income from property. The personal allowance and thresholds on taxes on savings and dividends remain a UK ‘reserved’ matter.

Find out more about the dividend allowance and personal savings allowance in our article Individual rates and order of taxation.

Marriage allowance

Married couples and civil partners can apply to transfer 10% of the income tax personal allowance from one to the other. The term marriage ‘allowance’ is inaccurate as it is a transfer rather than an additional allowance.

To qualify, neither of the partners can be a higher rate taxpayer and they must not be claiming the married couple’s allowance.

An application for marriage allowance will result in a reduced personal allowance for the transferor. Note however that the recipient will receive a tax reduction rather than an increased personal allowance. When calculating an individual’s income tax liability, S23 ITA 2007 sets out seven steps in the tax calculation. In Step 3, the personal allowance is deducted. For the avoidance of doubt therefore, the recipient’s Step 3 allowance is not adjusted but instead the adjustment comes in a Step 6 where any tax ‘reducers’ are deducted from the tax liability.

Couples will be entitled to the full benefit in their first year of marriage. Both individuals must be born on or after 6 April 1935.

For those couples where one person does not use all of their personal allowance at the moment the benefit will be up to £238.

Who is entitled

Entitlement to the personal allowance and blind person's allowance is dealt with in Income Tax Act 2007, Part 3 Chapter 2. Tax reductions for married couples and civil partners are dealt with under Chapter 3.

Chapter 4 then states that the above allowances or tax reduction may be claimed for a tax year where the individual is resident for the tax year.

If the individual is non-resident then he/she may still qualify as:

  • an EEA national
  • a British Citizen (including those covered under the British Overseas Territories Act 2002)
  • a resident of the Channel Islands or the Isle of Man
  • a person who has previously resided in the UK and is resident abroad for the sake of their health or that of a member of their family who is resident with the individual
  • a Crown servant
  • a person employed in the service of any territory under Her Majesty's protection
  • a person employed in the service of a missionary society, or
  • a person whose late spouse or late civil partner was employed in the service of the Crown

Other individuals affected can benefit through other means, for example Double Taxation Treaties where applicable. (For more information, see the Residence, Domicile and Remittance Basis Manual page on the HMRC website.

UK resident but non-UK domiciled individuals who claim the 'remittance' basis for a tax year are not entitled to the personal allowance or blind person's allowance (S809G ITA 2007). See below comments however for dual residents.

If an individual is 'dual resident' in the UK and one of the following countries then he/she will be able to receive UK personal allowances in any tax year the remittance basis is claimed. (For more information, see the Residence, Domicile and Remittance Basis Manual page on the HMRC website.

The countries are:

  • Austria, Belgium, Burma (Myanmar), Fiji, Germany, Greece, Ireland, Kenya, Luxembourg, Mauritius, Namibia, Netherlands, Portugal, Swaziland, Sweden, Switzerland and Zambia.
  • At Budget 2014, the government launched a consultation on whether or not to restrict the income tax personal allowance for non-residents. Although the government is keen, it recognises the complexity for both employers and individuals who may be affected. Accordingly, The government announced in Autumn Statement 2014 that it will continue to discuss implementation of this change with stakeholders. Should the government decide to proceed, a more detailed consultation will be undertaken.

 

Claiming the personal allowance

If an individual already pays tax through their job or pension, or completes a Self Assessment tax return, then a personal allowance will be received automatically. In order to get the age-related personal allowance, the form Income Tax: age-related Personal Allowance (P161) pension coding needs to be completed.

2017/18 & 2018/19 allowances

 

2017/18

2018/19

 

£

£

Personal allowance

11,500

11,850

Income limit for personal allowances

100,000

100,000

Income limit for married couple's allowance

28,000

28,900

Married couple's allowance where either party born before 6 April 1935

8,445

8,695

Minimum amount of married couple's allowance

3,260

3,360

Blind person's allowance

2,320

2,390


The income limits above of £100,000 and £28,900 are based on 'adjusted net income' which is calculated in S58 ITA 2007 as follows:

calculation of adjusted net income

Step 1

Take the amount of the individual's 'net income' for the tax year.

  • Per S23 ITA 2007, net income is total income subject to income tax less specified deductions. The most important of the specified deductions are trading losses and payments made gross to pension schemes (relief under net pay arrangements).

Step 2

Deduct any grossed up gift aid donations (payment x 100/80)

Step 3

Deduct any grossed up pension contributions which were paid net

Step 4

Add back in tax relief received for payments made to trade unions or police organisations which were deducted in arriving at net income in Step One.

The result is 'adjusted net income' for the tax year. See Income tax personal allowance: planning ideas for a worked example showing the benefit of a pension contribution to reduce this.

Individuals with adjusted net income above £100,000

The personal allowance is reduced by half of the amount - £1 for every £2 - over the £100,000 limit. If income is large enough, the personal allowance will be reduced to nil. In practice, an individual's tax code will take account of the reduction based on an estimate of income. HMRC will work out the actual entitlement to Personal Allowance (if any) when the tax return is sent in.

where adjusted net income exceeds £100,000

In 2018/19 Edward who is 27 has adjusted net income of £105,000. His personal allowance is reduced by £2,500 to £9,350.

In 2018/19, at what level of income is entitlement to the personal allowances lost?

  • Individuals with adjusted net income of £123,700 will have their personal allowance reduced to £Nil.

The effective tax rate for adjusted net income between £100,000 and £123,700 is 60%. For example consider the following scenario for a non Scottish taxpayer.

2018/19

£

£

Difference £

Adjusted net income

123,700

100,000

23,700

Personal allowance

Nil

(11,850)

 

Taxable

123,700

88,150

 

£34,500 @20%

6,900

6,900

 

£34,500 to £123,700 @40%

35,680

 

 

£34,500 to £88,150 @40%

 

21,460

 

Total Tax

42,580

28,360

14,220

£14,220 / £23,700 = 60%.

Married couple's allowance

The allowance is only available to those married and living together for the whole or part of the tax year with at least one spouse born before 6 April 1935.

For 2018/19 the maximum amount of married couple's allowance is £8,695 and the minimum amount is £3,360. A claimant however only receives 10% of the allowance amount. The actual tax saving (based on a full year's eligibility) is therefore at least £336 and up to £869.50.

The precise amount depends on the claimant's income. It is subject to the £28,900 income limit, and is reduced by £1 for every £2 above the limit. The allowance is never reduced below the minimum amount.

The allowance is given in full in the year of separation or death of either spouse/partner.

further details on the married couple’s allowance

Marriages before 5 December 2005 - the old rule (S45 ITA 2007)

If a man meets the condition that, for the whole or part of the tax year he is married and his wife is living with him, then he can claim the allowance (unless an election for the new rules to apply is in force) in which case HMRC will reduce his tax bill by 10% of the married couple's allowance to which he is entitled. The actual amount depends on the husband's income as detailed below.

Marriages and civil partnerships on or after 5 December 2005 (S46 ITA 2007)

If an individual meets the condition that, for the whole or part of the tax year he/she is married or in a civil partnership and is living with the spouse or civil partner then the person with the higher net income can claim the allowance and HMRC will reduce the claimant's tax bill by 10% of the married couple's allowance to which he or she is entitled. The actual amount depends on the claimant's income as detailed below.

Note that these provisions also apply to a marriage before 5 December 2005 where an election for the new rules to apply is in force.

The year of marriage or entry into civil partnership (S54 ITA 2007)

In the year of marriage or entry into civil partnership, entitlement is reduced by one twelfth for each complete tax month (ending on the 5th) before the event. For example a marriage on 24 March 2019 would mean receipt of just one twelfth of the allowance for 2018/19.

Election by individual to transfer relief (S47 ITA 2007)

If an individual's spouse is entitled to a tax reduction above for a particular tax year, then the individual can elect to claim a tax reduction of 10% of half the minimum amount (ie. in 2018/19 half of £3,360 = £1,680).

Joint election to transfer relief (S48 ITA 2007)

If an individual's spouse is entitled to a tax reduction above for a particular tax year then the individual and the spouse or civil partner can jointly elect for the individual to claim a tax reduction of 10% of the minimum amount (i.e. in 2018/19 £3,360).

To summarise therefore the 'other' spouse can claim half of the minimum allowance as of right, or the couple can jointly claim for the 'other' spouse to get the whole amount. Elections under S47 and S48 above must be made before the start of the tax year in which it is first to apply. Claims must be made on the form Income Tax: transferring the Married Couple's Allowance (18). In the year of marriage or formation of civil partnership however, the election may be made in that year. The election will then continue in force for each subsequent tax year until withdrawn.

Transfer of unused relief (S51 ITA 2007)

If an individual's spouse or civil partner is entitled to a tax reduction which exceeds their tax liability then the individual may claim a tax reduction equal to the unused part providing that the spouse or civil partner notifies HMRC. The form Income Tax: notice of transfer of surplus Income Tax allowances (575(T)) should be used to transfer unused relief.

In other words, if an individual's tax liability is too low to utilise the allowance, then the individual can transfer the surplus to their spouse or civil partner.

Blind Person's Allowance

Under S38 ITA 2007, an individual can claim blind person's allowance for a tax year if he/she meets either of the following conditions for the whole or part of the tax year

  • The individual is registered blind under S29 of the National Assistance Act 1948 by a local authority in England and Wale
  • The individual is resident in Scotland or Northern Ireland and because of blindness is unable to do any work for which eyesight is essential.

There are no age or income restrictions. If both spouses or civil partners qualify for blind person's allowance then each is entitled.

Consider Sally who is 58 and registered blind with her local authority in England. She has:

  • An annual salary of £14,500
  • A personal allowance of £11,850
  • Blind person's allowance of £2,390

She will only pay tax on £260 (£14,500 less the sum of £11,850 and £2,390).

Transfer of blind person's allowance to a spouse or civil partner (S39 ITA 2007)

If a blind person's tax bill isn't high enough to fully use the blind person's allowance then it is possible to transfer any unused allowance to a spouse or civil partner. As above completion of form 575 will achieve this.

Labelled Under:
Personal Allowance Income Tax

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