Zero Personal Allowance

Zero Personal Allowance

by Ashley Clark, Director - March 2010

DEALING WITH THE LOSS OF THE PERSONAL ALLOWANCE

From 6 April 2010, the standard personal allowance will be subject to a single income limit of £100,000.  Where an individual’s “adjusted net income” is below or equal to the £100,000 limit, they will continue to be entitled to the full amount of the standard personal allowance.

Where an individual’s adjusted net income is above the income limit of £100,000, the amount of allowance will be reduced by £1 for every £2 above the income limit.  The personal allowance can be reduced to nil from this income limit.  For example, based on the personal allowance of £6,475 for 2010/11, an adjusted net income of £112,950 or above would mean that no personal allowance is available.  

A number of people may have adjusted net income of just over £100,000 which will cause them to lose their personal allowance.  How can they plan for this forthcoming tax change? Well, much will depend on the type of income that causes the cut back.

Earned income

Where it is earned income that takes the individual into the £100,000-£112,950 income bracket they should seek to reduce this by either

- paying a pension contribution or
- arranging for a salary sacrifice

This could achieve an effective tax saving at 60%.

Investment income

Where it is investment income that causes an individual’s adjusted net income to fall into the £100,000-£112,950 band then, depending on their circumstances, any of the following may be appropriate strategies:-

· redistribution of investment capital to a spouse with a lower income so that the income generated is taxed on him/her instead

· reinvestment in tax free investments, such as an ISA, so that taxable income is replaced with tax free income

· reinvestment in tax efficient investments that generate no income and so will not impact on the loss of the personal allowance.  Such investments would include

- certain National Savings products
- unit trusts/OEICs geared to producing capital growth
- single premium investment bonds from which a 5% tax-deferred withdrawal may be taken each year, for 20 years, without affecting the personal allowance calculation.