The Chancellor has amended his original proposal, in the Pre-Budget Report, for the basic personal allowance to be phased out in two stages: now there will be a single threshold of £100,000 above which the allowance will be phased out.

Baker Tilly analysis

The original proposal was to remove the basic personal allowance from higher incomes in two stages; half when income exceeded £100,000 and half when income exceeded £140,000.

Now the allowance will reduce by one pound for every two by which the £100,000 threshold is exceeded.

This has the virtue of being simpler than the original proposal, it will, however, increase the tax take for the Government.

In detail

The measure affects the basic personal allowance but does not extend to other personal allowances which are not affected by this change.

The income taken into account is an individual’s income net of deductions for losses, contributions made gross to pension schemes and gift-aid payments. This is the same method of calculation as is used for the age-related reductions to allowances for people aged over 65.

We won’t know what the basic personal allowance for 2010/11 is going to be but based on the 2009/10 allowance of £6,475 and the new top rate of 50% tax, the maximum cost for a top-rate taxpayer would be £3,237.50.