New personal allowance rules for 2010/2011

The big changes to the personal allowance come from April 2010. There will be two new limits designed to restrict the amount of the personal allowance available. The PBR notes state that: '…If an individual's gross income is above the income limit of £100,000, the amount of their allowance will be reduced by £1 for every £2 above the income limit up to a maximum of one half of the basic personal allowance. If an individual's gross income is above a second income limit of £140,000, the amount of their allowance will be further reduced by £1 for every £2 above the income limit up to a maximum of the full amount of the basic personal allowance…' There will therefore be two new limits when looking at the personal allowance. If you exceed the limits the personal allowance will be reduced by £1 for every £2 over the limit (ie by half of the amount by which your income exceeds the limit). If your income is above £100K but less than £140K you're guaranteed to receive at least half of the personal allowance. The full personal allowance in 09/10 is worth around £2.5K in tax for a higher rate taxpayer. What is income? This is a key issue. What definition of income do the £100,000 and £140,000 limits apply to. Is it income:

before or after expenses are deducted?

before or after pension contributions?

before or after any losses are offset?
Also what kinds of income does it apply to - all income or only certain types of income? Does it apply to capital gains? It's pretty clear that it won't include capital gains, as the personal allowance only applies for income tax purposes anyway. It will apply to all forms of income, and will therefore include:

savings income

trading income

rental income

employment income The PBR notes state that the £100,000 and £140,000 limits apply to gross income which includes total income (as defined in section 23 of the Income Tax Act 2007) after the deduction of trading losses. Section 23 of the Income Tax Act 2007 defines total income as: '...Identify the amounts of income on which the taxpayer is charged to income tax for the tax year. The sum of those amounts is "total income"...' This would therefore indicate that the income is after the allowable expenses (as that is taken into account in calculating the income subject to income tax). The PBR notes also specifically state that it's after trading losses are offset.