Allowances and reliefs

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Allowances and reliefs
Theory and practice of taxation AModule code
C33TA1 Lect 12

• Income reducing Allowances
• Basic Personal Allowance PA
• Personal Age Allowance PAAAged 65-74Aged
  75 and over
• Blind Persons Allowance

• Tax Reducers
• Married Couples Age Allowance MCAAElder
  spouse born before 6 April 1935 and aged under
  75Elder spouse Aged 75 and over
• Maintenance payments
• Investments in VCTs, under the EIS and CITC

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Allowances and reliefs

• INCOME REDUCING ALLOWANCES

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Application of Income reducing Allowances

• The allowance is deducted from
• the taxpayers Statutory Total Income (S.T.I.)
• to give taxable income.
• This has the effect of reducing the amount of
  income
• on which income tax must be paid.
• Relief will therefore effectively be obtained at
  the individuals marginal rate of tax
• i.e. the highest rate of tax that an individual
  pays.

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INCOME REDUCING ALLOWANCES - Personal Allowances

• Determining factors
• Age of individual
• Level of income received (in some cases)

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INCOME REDUCING ALLOWANCES - Basic Personal
Allowance

• Basic Personal Allowance PA
• Allowance given automatically to all UK residents
  and some non residents (eg EU residents)
• The allowance is given in full in the tax year in
  which a taxpayer is born or dies
• The allowance is specific to the individual - any
  unused personal allowance PA of one spouse can
  never be transferred to the other or to anyone
  else
• The PA for 2006-07 is 5,035

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BASIC PERSONAL ALLOWANCESEXAMPLE 1

• Mrs Green, aged 45 on 6 April 2006 had income of
  3,000 in 2006-07
• (a) Calculate her taxable income for the year
• (b) What proportion of her personal allowance may
  be transferred to her spouse?
• SOLUTION
• Statutory total income
  3,000
• Personal allowance
  3,000 Taxable income
  NIL
• Her unused personal allowance 2,035
  (5,035-3000)may not be transferred to her spouse

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BASIC PERSONAL ALLOWANCESEXAMPLE 2

• Mr Black, aged 59 on 6 April 2006 has income of
  30,000 for 2006-07
• He died on 1 February 2007.
• Calculate his taxable income for 2006-07
• SOLUTION
• Statutory total income
  30,000
• Personal allowance
  5,035
• Taxable income
  24,965
• The personal allowance is given in full in the
  year of death (or birth).

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INCOME REDUCING ALLOWANCES Personal Age
Allowances

• Personal Age Allowance PAA
• For those aged over 65, or who reach the age of
  65 during the tax year the personal allowance is
  increased to 7,280 for 2006-07
• For those aged over 75, or who reach the age of
  75 during the tax year the personal allowance is
  increased to 7,420 for 2006-07
• The allowances are given in full in the year in
  which the taxpayer dies
• Unused allowances are not transferable

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INCOME REDUCING ALLOWANCES - Personal age
allowances

• Reduction of personal age allowance
• If an individuals Statutory Total Income (STI)
  is above a certain limit, the allowance will be
  reduced
• The allowance can not be reduced below the basic
  personal allowance available to all taxpayers
• When a taxpayer makes a donation under Gift Aid
  the STI that is compared with the income limit
  must be reduced by the gross amount of the
  donation.
• In other words the STI arrived at if the gross
  amount of the gift aid payment was included in
  the computation like an annual charge (Dont
  include it twice)

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INCOME REDUCING ALLOWANCES Personal Age
Allowances

• RESTRICTION OF AGE-RELATED ALLOWANCES 2006-07
• The full amount of the allowances may be claimed
  where the Statutory Total Income does not exceed
• 20,100 (The upper income limit)
• Where this is exceeded, the excess is calculated
  and the PAA is reduced by ONE-HALF of this
  excess

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INCOME REDUCING ALLOWANCES Personal Age
Allowances

• Mr Brown is 65 on 15 December 2006.
• His income for 2006-07 is 10,000
• Calculate his taxable income for the year.
• SOLUTION
• Statutory total income
  10,000
• Less Personal allowance
  7,280
• Taxable income
  2,720
• The personal age allowance is given since Mr
  Brown attains 65 in the year of assessment The
  full allowance is given since his income did not
  exceed the Upper income limit of 20,100.
  

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INCOME REDUCING ALLOWANCES Personal Age
Allowances

• Mrs Grey was born on 1 April 1932. Her income for
  2006-07 was 23,000
• Calculate her taxable income for the year.

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Personal Age AllowanceMrs Grey Solution

• Restriction of allowance
• Statutory total income
  23,000
• Less upper income limit
  20,100
• Excess of income 2,900
• Personal age allowance Aged 75 on1/4/07ie during
  tax year 2006-07 7,420
• Less restriction 1/2 excess of 2,900
  1,450
  
• PAA
  5,970
• This can not be reduced below 5,035
• Taxable income 2006-07
• Statutory total income
  23,000
• Personal allowance
  5,970
• Taxable income
  17,030

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INCOME REDUCING ALLOWANCES - Blind Persons
Allowance

• An allowance of 1,660 is available to a person
  who is registered blind at any time during the
  tax year
• The allowance is available for the year before
  registration, if proof of blindness were obtained
• A married couple who are both blind may each
  claim the allowance
• A married blind person may transfer unused blind
  persons allowance to his/her spouse and same sex
  civil partners (whether or not blind)

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INCOME REDUCING ALLOWANCES - Blind Persons
Allowance

• Example
• Angela, aged 60 on 6 April 2006, has an annual
  salary of 30,000.
• She has a loan of 14,000 at 10 to buy shares in
  her employee-controlled company, and another loan
  of 10,000 at 14 to buy a conservatory for her
  house.
• She receives Bank interest (net) of 1,000 per
  annum.
• Her husband is registered blind but has no income
  of his own.
• What is her taxable income for 2006-07?

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INCOME REDUCING ALLOWANCES - Blind Persons
Allowance

• Solution
• Total Non- Savings
• Savings
• Salary 30,000 30,000
• Bank int 1,000x100/80 1,250
  1,250
• 31,250 30,000 1,250
• Less charge
• 14,000_at_10 1,400 1,400
• STI 29,850 28,600 1,250
• Less Personal allowance -5,035 -5,035
• Blind PA -1,660 -1,660
• TAXABLE INCOME 23,155 21,905 1,250

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INCOME REDUCING ALLOWANCES - Blind Persons
Allowance

• Example
• Mrs Green (aged 45 at 6 April 2006) is registered
  blind. Her income for 2006-07 is 5,000.
• 1. Calculate her taxable income for the year
• 2. What proportion of her personal allowances may
  be transferred to her (sighted) spouse?

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INCOME REDUCING ALLOWANCES - Blind Persons
Allowance

• Solution
• 1.Statutory total income
  5,500
• Personal allowance 2006-07 5,035
• Blind persons allowance 465
  5,500 Taxable income
  NIL
• 2.Surplus of BPA transferable to spouse
  1,660-465 1,195
• The unused part of her Blind Persons Allowance
  may be transferred to her spouse irrespective of
  whether or not he is sighted.

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