£50 gain from new tax allowance

Detail on the impact of the new £10,000 Personal Allowance - the level at which you have to start paying 20% income tax.

From the Treasury:

The increase in the personal allowance to £10,000 will take 257,000 
individuals out of income tax altogether in 2014-15. 

By April 2014, the cumulative effect of this Government’s increases in the 
personal allowance will lift 2.7 million people out of the income tax system. 
In 2014-15, the increase will provide 24.5 million individuals with a real 
terms gain (over and above that from normal indexation) averaging £50. 

Of these, 20.4 million will be basic rate taxpayers and 4.2 million higher 
rate taxpayers (figures may not sum due to rounding). 

0.47 million individuals will have an average loss of £50 in 2014-15. All of 
these have incomes above the breakeven level near £120,000 at which 
the personal allowance is tapered to zero and so no benefit is derived 
from the personal allowance increase.

Average earners hit by pension limit?

How could someone on an average wage be hit by a reduction from £50,000 to £30,000 in the amount that can be saved each year into a pension scheme?

Well, it could happen but most would escape.

Take, for example, an employee on an average wage of £25,900 with 15 years in a nice final salary pension scheme.

That means the pension is a proportion of final salary, possibly building at 1/60 of salary for each year worked. The tax office multiplies each year's gain by 16 to see if it exceeds the annual allowance - the one which could drop to £30,000.

Our example would have to gain more than £1,875 in a year to breach the limit.

Unlikely? Yes, but say the person was promoted to a management job on £35,000. In that case there would be a sudden gain in pension entitlement achieved in just one year.

By my calculation it would be £2,858.

Our employee would have to pay a tax charge the part of the gain which exceeded the annual limit. In this case it would be a charge of £196.

BUT - and this is a big BUT - everyone is able to deploy unused annual allowance from the previous three years.

Those on medium and even many on higher wages are likely to have plenty of allowance to spare. In which case they could escape the tax charge.

Nowadays, more people on being signed up to pensions which aren't guaranteed by their employers. All that happens is that the employee and the company put in some money in a pension fund each month - and the pension you get at the end just depends on how well the fund does.

The situation is a lot simpler for these employees. Their contributions, including company contributions, would have to exceed £30,000 a year, which isn't likely to worry most of them.

£379 saving from £10,000 allowance

A basic rate taxpayer would save £379 a year from an early move to Nick Clegg's £10,000 personal allowance - the amount you can earn before income tax kicks in. 

That's £31.58 a month or £7.29 a week.

In addition, of course, those with incomes under £10,000 wouldn't have to pay income tax at all.

Here's a table, kindly supplied by the tax experts at the CIOT, which shows how the calculation is done.

Year	Personal allowance	Amount saved by basic rate taxpayer compared to previous	Amount saved by basic rate taxpayer compared to 2010-11
2010-11	£6475
2011-12	£7475	200	200
2012-13	£8105	126	326
??	£10000	379	705

Courtesy of the Chartered Institute of Taxation

Another step to £10,000 allowance...

Look ahead to the election campaign of May 2015. Wouldn't it be nice, thinks Chancellor Osborne - if it's still him - to go into it with a £10,000 personal tax allowance already implemented?

That would mean a £10,000 allowance starting in April 2015.

The 2011-12 allowance is £7,475. To get to £10,000 by the next election requires four steps.

If each step was equal, the annual jump in the allowance would be £631.

What's the rumour about today's Budget announcement? That there will be a £600 rise. No surprises then...

A reminder of what they said in the Coalition Agreement:

"We will further increase the personal allowance to £10,000, making real term steps each year towards meeting this as a longer-term policy objective."