New Personal Allowance Rules in the PBR

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. Here's an example as to how we expect the new rules will apply. We don't know the personal allowance for 2010/2011 but we'll assume its £6,500 for this example. The other rates and allowances for the current tax year apply. Jack has earnings of £50,000. He'll qualify for the full personal allowance of £6,500 which will reduce his taxable income to £43,500. Bill has earnings of £110,000. His earnings exceed the £100,000 limit by £10,000. Therefore his personal allowance would be reduced by £5,000. However this is restricted to half of the personal allowance so he'll receive a personal allowance of £ 3,250 Percy has earnings of £160,000. His earnings exceed the £100,000 limit as above. He's therefore initially receive a personal allowance of £3,250. However, as his earnings also exceed the £140,000 limit by £20,000 this would be reduced by up to £10,000. As this exceeds his available personal allowance he would not receive any personal allowance. If his earnings had been £142,000 his available personal allowance would have been reduced by £1,000 (ie 142K-140K/2). He'd therefore be entitled to a personal allowance of £2,250. 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