Pensioners have benefited from a large rise in
their tax-free personal allowances. The rise of
nearly £1,500 for people aged 65 and over
was intended as compensation for the loss of
the 10% tax band. People aged 65 to 74 with
income up to £21,800 now pay no tax on the
first £9,030 of income, and those aged 75 or
more pay tax only on income over £9,180.
The age-related part of the personal
allowance is reduced by £1 for every £2 of
income over £21,800. This rule now results in a
band of income between £21,800 and £27,790
being taxed in effect at 30% for a person aged
65 to 74. The extra 10% on top of the 20%
basic rate of tax results from the withdrawal of
the age allowance. For people aged 75 and
over, this 30% band goes up to £28,090.
However, the beginning of a tax year is an
ideal time to plan to make sure your income
stays below £21,800. If you are married or in
a civil partnership, and one of you has income
below £21,800, you could transfer incomeproducing
investments from the higher
income partner to the other to maximise your
combined entitlement to the age allowance.
If that still leaves one of you with income above
£21,800, you could consider switching to
investments that produce capital gains instead
of income. Capital gains are now taxed at 18%
and the first £9,600 of gains in the current tax
year is free of tax. Ideally you should make the
switch soon and before a lot of taxable income
has accrued, although you must always
consider whether what you plan to buy is a
good investment as well as being tax-efficient.
Some investments are tax-free, such as
National Savings Certificates, though again
you should compare net investment returns.
You should certainly use your ISA allowance
and there is no need to wait until the end of
the year to do this.
If you are under 75 years old, you might even
consider paying money into a pension
scheme. The payment, grossed up by 20%
for basic rate tax, is deducted from your
income in the age allowance calculation.
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