Age Related Personal Allowance: The Changes That Will Affect You

The Chancellor recently announced plans to scrap the additional age related personal allowance for pensioners. We explain how your finances will be affected.

Following George Osborne’s announcement of the government's intention to phase out the additional age related personal allowance, we explain what this means for your finances and whether you will lose out.

What is a personal allowance?

Personal allowance is the amount of money you can earn each tax year before paying Income Tax.

At the moment your personal allowance is determined by your age.

For the 2013/14 tax year anyone under the age of 65 has a basic personal allowance of £9,440.

However, if you are over 65 then you have a slightly higher annual personal allowance, dubbed the "additional age related personal allowance".

Currently anyone born between 6th April 1938 and 5th April 1948 has a basic personal allowance of £10,500 while those born before 6 April 1938 have an allowance of £10,660.

Personal allowance thresholds

All UK citizens are entitled to a personal allowance and even if your annual income is above the personal allowance threshold you only pay tax on earnings above this level.

However, there is an exception to this; if you earn over a certain amount your personal allowance will be gradually withdrawn and you'll pay tax on all your income.

For the 2013/14 tax year this "maximum income level" is set at £100,000 for those under 65, while for over 65s it is set at £26,100.

What’s set to change?

Update: The changes outlined below have now come into force.

In the 2012 Budget George Osborne announced that the additional personal allowance extended to those over the age of 65 will be gradually phased out. This will happen in two stages.

Firstly, while the personal allowance for under 65s will increase by £1,100 in April 2013, those over the age of 65 will not benefit from an increase. Instead their personal allowances will remain at 2012/13 levels  - 10,500 for those aged 65 - 74, and 10,660 for those over the age of 75.

Secondly, anyone who turns 65 on or after 6th April 2013 will not benefit from the additional age related personal allowance at all. Instead they will have the same personal allowance as those under 65.

This means that someone who turns 65 on the 6th April 2013 will be entitled to a personal allowance of £9,205 for the 2013/14 tax year rather than the £10,500 they might have expected.

When will this be implemented?

These withdrawal of the additional age related personal allowance will commence on 6th April, 2013, while existing over 65s will see their personal allowance fixed at 2012/13 levels following the planned increase in April, 2012.

How much will the changes cost me?

It’s estimated that the changes will hit those that turn 65 on or after 6th April, 2013 the hardest as they will no longer benefit from the additional age related personal allowance.

For example, someone turning 65 on 6th April 2013 with an annual income of £10,500 will find themselves paying £259 a year in tax.

Those with an equal income that turned 65 on 4th April 2013 would get to keep all of their income tax free, making them better off on paper at least.

George Osborne has stated that 'no pensioner will lose in cash terms' as a result of the removal of the additional age related personal allowance. This is due to plans to introduce a higher single-tier state pension of around £140.

Full details of the single tier pension have yet to be confirmed so it’s not yet clear whether this is really the case.

One thing is certain however, exactly how much these changes to the personal allowance will cost you will depend on your age, income and the rate of inflation between now and April, 2013.