Reduced personal allowances for the wealthy

As part of his 'tax the rich' measures, the Chancellor announced a proposed reduction of personal allowances for those with incomes exceeding £100,000. The allowance will disappear altogether for people with very high incomes. However, these changes will not take effect until April 2010.

Baker Tilly analysis

There are two significant changes to personal allowances:

• The increase in personal allowances for 2008/09, introduced to compensate for the ending of the 10 pence tax rate, is made permanent.
• From April 2010 the full personal allowance will only be available to taxpayers with income not exceeding £100,000.
• The first of these measures is a mere technicality; the second is a political move of great symbolic importance, but will also raise over £1 billion in tax.

In detail

Following the outcry on the abolition of the general 10 pence tax rate in the 2008 Budget, the basic personal allowance was increased by £600 from £5,435 to £6,035.

Making this change permanent is a technical measure which was necessary in order to preserve the index-linked nature of the personal allowance. Without it, the 2009/10 allowance would theoretically have to be based on the original 2008/09 allowance of £5,435.

In practice, the allowance can be set as the Chancellor sees fit. The 2009/10 personal allowance will be £6,475. This is £125 more than would be required by index-linking, enabling the Chancellor to claim that he has given away an extra £25 to anyone paying income tax at the basic rate of 20%.

From April 2010 an individual with income exceeding £100,000 will suffer a progressive reduction of the basic personal allowance (in addition to the proposed 45% tax rate). The reduction will take effect in two stages:

• On incomes up to £140,000 the allowance will be reduced by £1 for every £2 of income above £100,000. The maximum reduction in this income bracket will be one half of the basic personal allowance.
On higher incomes, the allowance will continue to be reduced by £1 for every £2 of excess income, and will disappear altogether if the income is high enough. (At the 2009/10 rate, the allowance would disappear on income of £146,475.),

The reduction will not apply to additional personal allowances given by reason of age or other factors.