e-mail Paul Lewis on paul@deadline.demon.co.uk
The changes to income tax announced in November's Budget start on 6 April.
They should mean that most older people will pay less tax and some will stop
paying tax altogether.
Personal allowance
Each year everyone is allowed to have a certain amount of income before they
have to pay tax. This personal tax allowance was increased by a significant
amount in the Budget - £200 more than was needed to keep up with inflation.
The new figures for 1997/98 are set out in the box - they are higher if you are
aged at least 65 by the end of the tax year. If your income in the 1997/98 year
is less than the figure that applies to you then you should be paying no tax.
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Personal tax allowances 1997/98
Age under 65 65-74 75 or more
on 5/4/98 on 5/4/98 on 5/4/98
Allowance £4045 £5220 £5400
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These figures apply to everyone, married or single, young or old. Many
individual pensioners have incomes below these levels and should pay no tax.
However, if you have money saved in a bank or building society then the
interest it earns is taxed automatically. The bank or building society takes off
a fifth of it and sends it to the Inland Revenue. If your income is low enough to
pay no tax you should register with the bank or building society so that your
income is paid gross without this tax being deducted. If you think you have
wrongly lost tax in the past then ask for it back. The Inland Revenue says
there is £500 million waiting to be reclaimed! Ask at your bank or building
society or at the local Tax Enquiry Centre.
Married couples
The Chancellor also decided to increase the extra tax allowance for married
couples. This tax allowance causes much confusion. It is a 'restricted'
allowance. Instead of being an amount of income you can have without paying
tax, it simply means you get an amount deducted at the end of the tax
calculation. The amount that is taken off deducted is 15 per cent of the
allowance. The amounts of the allowance and the value of the deduction are
set out in the table below.
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Married couple‘s allowance 1997/98 - amount and value
Age under 65 65-74 75 or more
Amount £1830 £3185 £3225
Value £274.50 £477.75 £483.75
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The Government confuses everybody by persisting in calling them 'tax
allowances' and quoting them at their full value. All you have to remember is
that the 'allowance' is multiplied by 15 per cent and then that is deducted from
your tax at the end of the calculation. In other words if you are a married man
aged 67 then your tax is £477.75 less than if you were single.
There are two other complications of these allowances. First, the amount
allowed depends on the age of the older spouse. So a man aged 55 married to a
woman aged 65 gets the middle rate of the allowance based on her age. Second,
although the full amount is normally taken off the husband's tax, some of it
can be allowed to the wife instead. She can have £915 of the allowance (worth
£137.25 off her tax) if she asks for it before the end of the previous tax year, so
act quickly to get a request in by April 5. And if her husband agrees she can
have £1830 (worth £274.50 off her tax) again if she asks by April 5. These
amounts are the same whatever her or her husband's age.
And remember that your age is counted on the last day of the tax year - April
5, 1998. So if you reach 65 or 75 by that age make sure you are getting the
higher tax allowance for the whole tax year.
Widows also get an extra tax allowance in the tax year their husband dies and
the next tax year. It is always £1830 regardless of her age and is worth
£274.50 off her tax.
Tax Threshold
The tax threshold is the maximum income you can have before you pay tax. If
you just get the personal tax allowance then your tax threshold is the same as
the allowance. If you get a married couple‘s allowance as well then your tax
threshold is your personal tax allowance plus three-quarters of your married
couple‘s allowance. The table below shows the tax threshold for married men
who get the whole married couple‘s allowance and for widows who get the
widow‘s bereavement allowance.
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Tax threshold for married men and widows 1997/98
Age under 65 65-74 75 or more
Married man £5417 £7608 £7818
Widow £5417 £6592 £6772
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If you are a married man or a recently bereaved widow and you income is
below these amounts then you should pay no tax. It is very important that you
check that no tax is being deducted from the interest on your bank or building
society account. If it is, arrange for it to be paid gross in future and see if you
have a claim for tax wrongly deducted in the past.
Age allowance limit
If your income is more than £15,600 a year the extra tax allowances for people
aged 65 or more are reduced. The reduction is at the rate of £1 off the
allowance for every £2 extra income. A single person aged 65 to 74 can get
some age allowance if their income is below £17,950 and the limit is £18.310 if
they are 75 or more. The amounts are higher for married men - as high as
£21,100 for the over 75s. But once your income exceeds these amounts you will
only get the same tax allowances as younger people.
Rate of tax
The Chancellor decided to cut the basic rate of income tax from 24 per cent to
23. The lower rate of 20 per cent and the higher rate of 40 per cent were left
unchanged.
The lower rate is charged on investment income such as interest on a bank or
building society account. It is also the rate charged on the first £4100 of other
income, such as wages or a pension, above your personal tax allowance.
The higher rate is charged on any income over £26,100 on top of your personal
tax allowances. So that will only bother you if your income is more than
£30,145 in the year.
Everything else is taxed at the basic rate which is 23 per cent for this year. If
you have a home income plan your income will be reduced slightly because the
tax relief on your mortgage interest will be cut. The difference will be around
£14 a year. The cut will also reduce slightly the money which charities get
from covenants - about £1.70 for every £100 covenanted.
Rent a room
If you have a spare room you can now make £4250 a year from it without
paying a penny in extra tax. This is £1000 more than the allowance last year
and with the growing number of students - about a third of all young people
now go into higher education - it could be a lucrative way to boost your income.
The rules are very simple. You just let out a furnished room in your own home
and, as long as the rent income is no more than £4250 then you don‘t have to
pay a penny in tax. You don‘t even have to tell the Revenue about it. Now
£4250 a year is a rent of just over £81 a week which should more than pay any
expenses you have and leave you with a useful profit. The only drawback is
that you have to have someone else in your home. Remember that it is always
safer to find someone through a reputable letting agency. If you live near a
university or college it will have a student lettings department.
Inheritance tax
The Chancellor also raised the threshold for paying inheritance tax from
£205,000 to £215,000. From April only about one estate in fifty will pay any
inheritance tax.
Higher taxes
The cuts in direct taxation were partly matched by higher taxes on goods and
services - the so-called indirect taxes. The duties on tobacco and petrol were
raised well ahead of inflation - an extra 15p on a packet of 20 cigarettes and an
extra 3p a litre on petrol. The extra £5 on car tax - raising it to £145 a year -
was also higher than inflation and if you do not pay it you are now likely to
have your car clamped! But remember there is a special zero rate for cars more
than 20 years old. The tax on air travel will double in November to £10 for
flights to European countries and £20 for journeys further afield. Holidays
were also hit by a higher tax on insurance premiums. The general tax on
insurance premiums - introduced in 1994 at 2.5 per cent - was raised to 4 per
cent for the new tax year. But insurance which is sold with other goods - for
example insurance against repairs or to cover your holiday - is now subject to a
higher rate of 17.5 per cent - the same as the rate of VAT. So although you
may have an extra pound or two in your pocket, when you want to buy
something it will not go as far as it did.
March 1997
e-mail Paul Lewis on paul@deadline.demon.co.uk