Personal Allowance Increase After 65 With Reduced Allowance When Earning Over

DPhil

I'm receiving a government pension and still working.

HM Revenue has just sent me a bill saying that I'm not paying enough tax.

My understanding is that a single person allowance goes up from [FONT=&quot]£[/FONT]6475 to [FONT=&quot]£[/FONT]9490 (tax year 2010/2011) when you aged over 65 (and I am 68). When I queried this with them, they said my personal allowance has automatically reverted back to [FONT=&quot]£[/FONT]6475 because I earned over [FONT=&quot]£[/FONT]20k a year. I can't see this documented anywhere from the papers they sent me. This isn't right!?

Will anybody be able to shed some light?

Thanks,
Phil

noh

Yes it is correct.
The income limit for age related allowance 2010/2011 was £22900.
For every £2 your income exceeded that amount your age related allowance was reduced by £1 until the personal allowance of £6475 is reached.
See
http://www.hmrc.gov.uk/incometax/personal-allow.htm#1

DPhil

Many thanks for the clarification and prompt response. Much appreciated!

dunstonh

. I can't see this documented anywhere from the papers they sent me. This isn't right!?

Yes it is right. The age allowance reduces by £1 for every £2 of income over the age allowance reduction figure. It carries on at that rate until the age allowance is wiped out and you are left with the basic personal allowance. The age allowance is effectively a means tested allowance.

The figure gets adjusted each year in the budget. A few years back it was £20,900 but currently it is £24,000.

So, if you earned £26,000 (which is earned income, pension income (including state), interest and unwrapped dividends etc) then £2000 would be over the age allowance limit which would reduce the personal allowance by £1000.

There are ways to avoid it. e.g. taking greater pension tax free cash to reduce income. Use the full ISA allowances each year, investment bonds are also exempt. If you still have more after that then try and use capital growth with capital withdrawals as income as these are not taxable under income tax but capital gains tax and you have £10k tax free there each year.

Mikeyorks

You should have completed a P161 (Pension Coding) form as your State Pension came into play. Did you not do so? As it's designed to determine just how much / little of the age related personal allowance you get.

http://search2.hmrc.gov.uk/kb5/hmrc/forms/view.page?record=VYd0uMhbiYk&formid=3161

It's normally prompted by DWP advising HMRC a pension is imminent. But it's not foolproof where DWP don't hold any tax links for you.