For individuals

News: March 2012

For individuals

Personal Allowances

The big news for individuals is that the personal allowance will increase to £9,205 from 6 April 2013, so you have to wait another year for that extra tax-free income. The personal allowance has already been increased by £630 from 6 April 2012 to £8,105, and the other allowances are increased as indicated below.

A source of complexity for older taxpayers is the application and withdrawal of age-related allowances, which are currently given when the taxpayer reaches age 65. These age-related allowances are withdrawn when the taxpayer’s total income exceeds £25,400 (for 2012/13).

From 6 April 2013 those who reach age 65 on or after that date will not receive an age-related allowance, but will instead be entitled to the standard personal allowance of £9,205. This allowance is expected to rise to £10,000 in April 2014 or 2015. The existing age allowances given to people born before 6 April 1948 will be frozen at current rates as shown below.

Personal allowances for 2012/13…
  • Under 65 (standard allowance): £8,105 (2013/14 – £9,205)
  • 65-74: £10,500 (2013/14 – £10,500)
  • 75 and over: £10,660 (2013/14 – £10,660)
  • Minimum married couples allowance*: £2,960 (2013/14 – TBA)
  • Maximum married couples allowance*: £7,705 (2013/14 – TBA)
  • Blind person’s allowance: £2,100 (2013/14 – TBA)
  • Income limit for allowances for age related allowances: £25,400 (2013/14 – TBA)
  • Income limit for standard allowances: £100,000 (2013/14 – £100,000)

* tax relief given at 10% where one partner was born before 6/4/1935.

Income Tax Rates

The tax rates for 2012/13 have not been changed from those applicable in 2011/12 (see below), but the threshold at which the 40% tax rate is applied is reduced to £34,370.

The reduction in the 40% threshold is balanced by the increase in personal allowance by £630. This means that in 2011/12 you start to pay 40% tax when your total income before allowances exceeds £42,475. In 2012/13 the 40% tax threshold is set at exactly the same amount: £42,475, before deduction of personal allowances. You can increase your own personal 40% threshold, by making donations under Gift Aid or paying personal pension contributions in the tax year.

Rates for 2012/13
  • Savings rate* (10%) – 0 to £2,710
  • Basic rate (20%) – 0 to £34,370
  • Higher rate (40%) – £34,371 to £150,000
  • Additional rate (50%) – over £150,000

* Only applies if non savings income is below this amount.

The rate on dividends remains at 10% for basic rate taxpayers, 32.5% for higher rate and 42.5% for additional rate. All come with a 10% tax credit.

Rates for 2013/14

There was much speculation before the Budget about the removal of the 50% rate that applies to taxable income above £150,000. This 50% additional rate remains in place for 2012/13, but will be reduced to 45% from 6 April 2013. The Government has also published most of the other tax rates and thresholds for 2013/14 as follows:

  • Savings rate* (10%) – 0 to £2,770 (estimate)
  • Basic rate (20%) – 0 to £32,245
  • Higher rate (40%) – £32,246 to £150,000
  • Additional rate (45%) – over £150,000

* Only applies if non savings income is below this amount

The rate on dividends will be 10% for basic rate taxpayers, 32.5% for higher rate and 37.5% for additional rate. All come with a 10% tax credit.

Child Benefit

Another area of speculation was the withdrawal of child benefit from families where at least one parent pays tax at 40% or higher.

The Chancellor listened to reason and has decided to taper the withdrawal of child benefit where the higher earner’s net income (after losses but before allowances), exceeds £50,000. For every £100 of income over £50,000, a tax charge will apply equivalent to 1% of the child benefit received by the family. This will lead to the complete withdrawal of child benefit at £60,000 of net income. This tax charge is to apply from 1 January 2013, and will be collected through PAYE and self-assessment from the higher earning partner in the family.

If you, or your partner, are currently in receipt of child benefit you don’t have to do anything now. HMRC will be writing to all those affected by this change later in 2012. However, please discuss with us how you could re-arrange the distribution of income within your family, to reduce the affect of the withdrawal of child benefit. Any action in this area should be taken as soon as possible to ensure the new arrangements are in place for the full tax year 2012/13.

Tax Credits

The following summarises the rates and thresholds that will be cut or frozen in 2012/13 compared to 2011/12.

Child Tax Credit
  • Family element – £545 (2011/12 – £545)
  • First income threshold – £15,860 (2011/12 – £15,860)
  • Second income threshold – withdrawn (2011/12 – £40,000)
Working Tax Credit
  • Basic element – £1,920 (2011/12 – £1,920)
  • Couple and lone parent £1,950 (2011/12 – £1,950)
  • 30 hour element – £790 (2011/12 – £790)
  • Childcare element:
    • Maximum costs for one child – £175 per week (2011/12 – £175 per week)
    • Maximum cost for all children – £300 per week (2011/12 – £300 per week)
  • Percentage of costs covered – 70% (2011/12 – 70%)
  • First income threshold – £6,420 (2011/12 – £6,420)
  • Withdrawal rate – 41% (2011/12 – 41%)
  • Income rise disregard – £10,000 (2011/12 – £10,000)
  • Income fall disregard – £2,500 (2011/12 – N/A)

The income disregard provides a buffer for changes in income, so overpayments of tax credits do not arise where income varies within this threshold year on year. This affects families with fluctuating incomes, such as the self-employed. If you are in this position you need to finalise your profit figures as close to the tax year end as possible and provide those figures to the Tax Credits office without delay.

There are also changes to the tax credit rules from April 2012, which affect the number of hours the adults in the family must work to qualify for working tax credits. Lone parents are not affected by these changes.

Cap on Tax Reliefs

The Chancellor wants to deal with wealthy individuals who take advantage of tax reliefs that have no annual limits, such as relief for trading losses, charitable donations, and capital allowances. He is proposing that from April 2013 all such tax reliefs will be capped at the greater of £50,000 per year or 25% of the taxpayer’s gross income. If this idea becomes law it could significantly affect loss-making businesses that are not conducted through a company.