Tax-free allowances for over-65s increased by £450

Millions of pensioners are set to benefit from a £450 increase in their age-related personal allowances next April, with the tax-free income band for over-75s rising above £10,000 for the first time.

But accountants warned that an additional 700,000 people with incomes of more than £42,475 will be hit by 40 per cent tax next year, following this week’s confirmation of 2011/12 tax rates and thresholds by the Treasury.

The personal allowance for people aged 65 to 74 rises to £9,940, and to £10,090 for those aged 75 or over – increases of about 4.7 per cent that are slightly above retail prices index (RPI) inflation.

The income limit for these higher allowances, beyond which they are progessively clawed back, rises to £24,000.

The little-known 10 per cent band for savings interest, which is available to some pensioners, is also being increased by £120 to £2,560.

“For pensioners, these increases are better than feared [given the deficit],” said John Whiting, policy director at the Chartered Institute of Taxation.

The Treasury also confirmed the previously announced rise in the 2011/12 personal allowance for under-65s of £1,000 to £7,475. However, the benefit will be clawed back from higher-rate taxpayers by lowering the income level at which 40 per cent tax becomes payable.

The size of the basic rate income tax band has now been set at £35,000 from April 2011, with the result that higher earners will be subject to 40 per cent tax on incomes over £42,475 – compared with £43,875 in the current tax year. Mike Warburton, tax director at accountants Grant Thornton, estimated that this reduction would drag 700,000 more people into the higher-rate tax net for the first time.

With the already announced one percentage point increase in National Insurance Contributions (NICs) rates also taking effect from April, accountants say that people earning more than about £42,500 will be worse off from the package of income tax
and NIC changes – while those on lower incomes stand to gain.

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