Income TaxPrint

Income tax is a tax paid on income. A number of sources of income are exempt from income tax, including ISAs, certain interest payments, redundancy payments, certain pension income and lump sums, and certain social security benefits.

The main rates of income tax for 2012/13 are as follows.

Rate On Taxable
Income
Cumulative tax
Basic Rate 20% £0–£34,370 £6,874.00
Higher Rate 40% £34,371–£150,000 £53,126.00
Additional Rate 50% Over £150,000

Where income tax at the basic rate has been deducted from income, and that income is chargeable at the starting rate for savings, repayment of the excess tax deducted can be claimed.

A special rate of 10% (the starting rate for savings) applies to savings income (other than dividend income) to the extent that such income does not exceed a 'starting rate limit' (£2,710 for 2012/13), treating savings income as the highest part of an individual's income other than dividend income. The starting rate for savings applies only to individuals.

Where income tax at the basic rate has been deducted from income, and that income is chargeable at the starting rate for savings, repayment of the excess tax deducted can be claimed.

A special rate of 10% (known as the dividend ordinary rate) applies to dividend income to the extent that such income does not exceed the basic rate limit (treating that income as the highest part of an individual's income). A special rate of 32.5% (known as the dividend upper rate) applies to dividend income to the extent that such income exceeds the basic rate limit but does not exceed the higher rate limit. A special rate of 42.5% (known as the dividend additional rate) applies to dividend income to the extent that such income exceeds the higher rate limit.

The `personal allowance’ takes the form of a deduction in arriving at taxable income. Strictly it requires a claim to be made but in practice it is nearly always given automatically. It is available to all UK-resident individuals. It is also available to certain other claimants. The allowance is given in full for all tax years including that in which death occurs. See below for the reduction of the personal allowance in the case of 'high income' individuals for 2010/11 onwards.

The basic personal allowance is as follows.

For 2012/13 £8,105
For 2011/12 £7,475
For 2010/11 £6,475
For 2009/10 £6,475
For 2008/09 £6,035

For 2013/14, the basic personal allowance will be increased to £9,205.

For 2010/11 onwards the personal allowance is no longer available in full to an individual whose 'adjusted net income' (see below) exceeds a limit of £100,000. The basic personal allowance is reduced by one-half of the excess above £100,000. If any allowance remains, it will be rounded up to the nearest pound. It follows that if the excess of adjusted net income over £100,000 is at least twice the amount of the basic personal allowance, the individual will be entitled to no personal allowance at all.

Where the claimant is at any time in the tax year aged 65 (or aged 75) or over, or would have been but for his or her death in that year, a higher allowance (generally known as an age-related allowance) is available. Where 'adjusted net income' exceeds an income limit, the age-related allowance is reduced by one-half of the excess until the allowance equals the amount that the claimant would have been entitled to if under 65.

The maximum age-related allowances, the income limit and the income level above which the age-related allowance is reduced to the level of the basic personal allowance are as follows.

Personal allowance Income Maximum income
65 to 74 75 or over limit 65 to 74 75 or over
For 2012/13 £10,500 £10,660 £25,400 £30,190 £30,510
For 2011/12 £9,940 £10,090 £24,000 £28,930 £29,230
For 2010/11 £9,490 £9,640 £22,900 £28,930 £29,230
For 2009/10 £9,490 £9,640 £22,900 £28,930 £29,230
For 2008/09 £9,030 £9,180 £21,800 £27,790 £28,090

For 2013/14 onwards, the availability of age-related personal allowances will be restricted. The allowance currently available to those aged 65 to 74 will be restricted to individuals born after 5 April 1938 but before 6 April 1948; the allowance will be permanently frozen at its 2012/13 level of £10,500. The allowance currently available to those aged 75 or over will be restricted to individuals born before 6 April 1938; it will be permanently frozen at its 2012/13 level of £10,660. Age-related allowances will continue to be subject to an income limit. All individuals born on or after 6 April 1948 will qualify for the basic personal allowance (subject to the reduction for those with adjusted net incomes above £100,000). If for any future tax year the basic personal allowance exceeds £10,500, an individual born after 5 April 1938 but before 6 April 1948 will be entitled to the basic personal allowance instead of the age-related allowance. The same applies to individuals born before 6 April 1938 if the basic personal allowance comes to exceed £10,660.

The information contained in this article is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. The author and the publisher disclaim all responsibility for any loss arising from any action taken or not taken by anyone using the information in this document