As announced in the 2014 Autumn Statement, the personal allowance for people born after 5 April 1938 will rise to £10,600 for 2015-16, and the basic rate limit will be set at £31,785.
Although income tax rates will stay the same in 2015-16, the tax-free personal allowance will rise from £10,000 to £10,600, and the basic rate limit will be £31,785. This means that those with income of less than £10,600 will pay no income tax, and those with taxable income of up to £42,385 will pay tax at the 20% rate.
Example 1 – Comparing the increase
Charles (aged 46) has income of £42,000 in both 2014-15 and 2015-16. His tax bill for each year is calculated as follows:
2014-15
Income £42,000
Less: personal allowance (£10,000)
Taxable income £32,000
Tax payable:
£31,865 x 20% = £6,373
£135 x 40% = £135
Total tax due £6,508
2015-16
Income £42,000
Less: personal allowance (£10,600)
Taxable income £31,400
Tax payable:
£31,400 x 20% = £6,280
Total tax due £6,280
In this example, Charles will be £228 better off in 2015-16.
Transferring unused allowances
From April 2015, a spouse or civil partner who is not liable to income tax or not liable above the basic rate for a tax year will be entitled to transfer £1,060 of their personal allowance to their spouse or civil partner, provided that the recipient of the transfer is not liable to income tax above the basic rate. The transferor’s personal allowance will be reduced by £1,060. The spouse or civil partner receiving the transferred allowance will be entitled to a reduced income tax liability of up to £212. However, note that married couples or civil partnerships entitled to claim the married couple’s allowance will not be entitled to make a transfer.
Restriction of personal allowance
The basic personal allowance is subject to a single income limit of £100,000. If an individual’s ‘adjusted net income’ (calculated in a series of steps) exceeds the £100,000 limit, the personal allowance is reduced by £1 for every £2 above the income limit. The personal allowance may be reduced to nil from this income limit. For 2015-16 therefore, taxpayers with taxable income between £100,000 and £121,200 will potentially suffer marginal tax rates of up to 60% as the personal allowance is withdrawn.
Example 2 – Bonus taxed at marginal rates
David, who has no other sources of income, earns £100,000 from his employment. He is paid a bonus of £5,000. His personal allowance in 2015/16 is £10,600, so he loses £2,500 of it (£1 for every £2 earned over £100,000 ((£105,000 – £100,000)/2)), leaving him with an allowance of £8,100. He will pay tax of £2,000 (£5,000 × 40%) on the bonus, plus an extra £1,000 effectively due to lost allowances (£2,500 × 40%). His total tax attributable to the bonus is therefore £3,000, giving a marginal tax rate of 60% (£3,000/£5,000 x 100 = 60%).
Nick earns £120,000 from his employment and is paid a bonus of £5,000. His personal allowance in 2015/16 is £10,600, so he would lose entitlement to all of it because his basic salary exceeds the point at which the allowance is fully withdrawn. Receiving the bonus, therefore, results in no further adjustment to his personal allowance. He will simply pay tax of £2,000 (£5,000 × 40%) on the bonus, and his marginal tax rate will be 40%. If Nick’s bonus took his income over £150,000, he would be liable to tax at 45% on the bonus.
Practical Tip:
Taxpayers who may suffer tax at marginal tax rates of up to 60% as illustrated above may wish to consider carefully the timing and amount of pension contributions. This may help reduce ‘net adjusted income’ and subsequent liability to higher tax rates.
