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Where Taxpayers and Advisers Meet

Income limit re Personal allowance transfer.

JRG
Posts:419
Joined:Wed Feb 03, 2010 4:40 pm
Income limit re Personal allowance transfer.

Postby JRG » Thu Dec 25, 2014 2:25 am

https://www.gov.uk/government/publicati ... or-2015-16

The above webpage shows the following for the 2015/16 tax year:
Personal allowance for those born after 05/04/1948 £10,600
Personal allowance for those born from 06/04/1938 to 05/04/1948 £10,600
Personal allowance for those born before 06/04/1938 £10,660
Income limit for personal allowance (for those born before 06/04/1948) £27,700

For those born before 06/04/1948, where their income exceeds the Income limit, the personal allowance is reduced by £1 for every £2 until it reaches the personal allowance of someone born after 05/04/1948.

For those born from 06/04/1938 to 05/04/1948 there should be no reduction in personal allowance as it is the same as for those born after 05/04/1948.

However, from the 2015/16 tax year, a married individual can have up to 10% of their non-taxpayer spouse’s personal allowance transferred to their own personal allowance, giving them a maximum personal allowance of £11,660.

My question is: Does the Income limit for those born before 06/04/1948 apply to their original personal allowance, or does it apply to their enhanced personal allowance?

If it’s the latter then it is unfair. Those born before 06/04/1948 whose income exceeds the Income limit will suffer a personal allowance reduction, whereas those born after 05/04/1948 will not.

bd6759
Posts:3543
Joined:Sat Feb 01, 2014 3:26 pm

Re: Income limit re Personal allowance transfer.

Postby bd6759 » Thu Dec 25, 2014 12:12 pm

Why is it unfair? Those born before 1948 will have a higher personal allowance. If their income exceeds 27.700 it is reduced, but it is not reduced below 10,600. A person born before 1948 with the 10% enhancement can have more income before it is reduced to the basic level.

JRG
Posts:419
Joined:Wed Feb 03, 2010 4:40 pm

Re: Income limit re Personal allowance transfer.

Postby JRG » Thu Dec 25, 2014 10:53 pm

bd6759: Each person born after 05/04/1938 will have the same £10,600 personal allowance in the 2015/16 tax year. Only those born before 06/04/1938 will have the slightly higher £10,660 personal allowance. (Only Gideon knows why everybody wasn't just given the same personal allowance for the sake of £60! I thought he was supposed to be simplifying the tax system.)

To explain why I think it's unfair, see the following examples.

Example 1: A person born after 05/04/1948 has an basic personal allowance of £10,600, which can be enhanced to £11,660 with the transfer of 10% of their non-taxpayer spouse's personal allowance. The income limit DOESN'T apply to them, so if their income is between £27,700 and £100,000 then their enhanced personal allowance stays at £11,660.

Example 2: A person born from 06/04/1938 to 05/04/1948 also has an basic personal allowance of £10,600, which also can be enhanced to £11,660 with the transfer of 10% of their non-taxpayer spouse's personal allowance. The income limit DOES apply to them, and if it is applied to their enhanced personal allowance, and their income is between £27,700 and £100,000 then their enhanced personal allowance will be reduced by £1 for every £2 of income, until, at an income level of £29,820, it is the same as the basic personal allowance of £10,600.

Question: If a person born after 05/04/1948 and a person born from 06/04/1938 to 05/04/1948 have the same original personal allowance, why does the former have no income limit when the latter does have an income limit?

AvocadoK
Posts:1232
Joined:Wed Aug 06, 2008 3:46 pm
Location:Lancashire

Re: Income limit re Personal allowance transfer.

Postby AvocadoK » Fri Dec 26, 2014 10:06 am

My question is: Does the Income limit for those born before 06/04/1948 apply to their original personal allowance, or does it apply to their enhanced personal allowance?
The (understandable) mistake you are making is to think of the transfer of the personal allowance as an enhancement of the personal allowance. When you dig down into the legislation, you find that you do not actually increase the personal allowance at all. In fact, what you have to do is take 10% of the standard personal allowance (£10,600, not the age related allowance), and deduct this £1,060 from the tax liability for the year.

Because the transferable allowance is not actually an enhancement of the personal allowance, any rules reducing the PA do not apply to it.

AK

JRG
Posts:419
Joined:Wed Feb 03, 2010 4:40 pm

Re: Income limit re Personal allowance transfer.

Postby JRG » Fri Dec 26, 2014 8:47 pm

Thank you AvocadoK for pointing out how the transferable personal allowance will work in practice.

Therefore, if my non-taxpayer wife requests that HMRC transfer 10% of her personal allowance to me, then when I complete my Self Assessment Tax Return for 2015/16, HMRC's calculations should show a deduction of £10,600 for my personal allowance and a deduction of £1,060 for my wife's transferred personal allowance, when determining my taxable income.

I have determined that by 2017/18 my annual income will be around the currently predicted higher rate threshold. Does the legislation show if my liability to pay higher rate tax is determined before or after the deduction of the 10% transferred personal allowance?

Harking back to my original posting: I'm still wondering why HMRC has an income limit for those born from 06/04/1938 to 05/04/1948 when they have the same personal allowance as those born after 05/04/1948.

AvocadoK
Posts:1232
Joined:Wed Aug 06, 2008 3:46 pm
Location:Lancashire

Re: Income limit re Personal allowance transfer.

Postby AvocadoK » Fri Dec 26, 2014 9:26 pm

The relief is not available at all if you are a higher rate tax payer.
Can't answer your second question!

JRG
Posts:419
Joined:Wed Feb 03, 2010 4:40 pm

Re: Income limit re Personal allowance transfer.

Postby JRG » Sat Dec 27, 2014 11:46 am

I know the relief is not available if I am a higher rate taxpayer, but as I won't actually know if I've exceeded the higher rate threshold until the end of the 2017/18 tax year, I shall be claiming the relief for that year and will pay any tax due when I complete my SATR.

Thank you for your help in this matter.

Have a Happy & Prosperous New Year!


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