Avoid the Age Allowance Trap

People over the age of 65 are given an increased Personal Allowance (PA) from £8,105 to £10,500 (12/13). Those over the age of 75 are given £10,666 (12/13). ‘Age Allowances’ are intended to ease some of the financial strain during retirement for those on lower incomes.

Age allowances are progressively withdrawn if a person’s income is over a certain limit, currently £25,400 (12/13). The extra allowance is reduced by £1 for every £2 of total gross income over the £25.4K limit.

For those aged over 65 with incomes in excess of £30,190, the personal allowance is reduced back down to the standard personal allowance for the under 65’s, namely £8,105 (12/13).

The gradual withdrawal of the age allowance is effectively a higher marginal rate of income tax. Taxpayers pay 20% on the income and then the withdrawal increases the effective rate if tax by half as much again. For example, the marginal rate of tax for people aged 65 – 75 earning between £25,400 and £30,190 therefore becomes 30%.

The impact of the age allowance trap can be reduced or even avoided through careful tax planning. A key approach might be to reorganise assets so that income bearing investments are moved to tax free environments or even transferred to spouses with less income .