Q. I am retired and in receipt of an occupational pension as well as my state pension. Recently I received my tax code notification from HMRC for the 2014/15 tax year. I was surprised to note that the personal allowance of £10,500 had been reduced to £10,000, because HMRC anticipated that I would earn in excess of £28,000 during the 2014/15 tax year. I have challenged this with HMRC and my personal allowance has been restored to the full amount. However, it came with a rider that I should inform HMRC if my income exceeds £27,000. Can you explain why this has happened, please? Also, will this rider still apply next year when the personal allowances increases to £10,500.
A. The amount of your personal allowance depends upon two factors; your date of birth and your total income in the relevant tax year.
In respect of the current tax year, the “standard” personal allowance for income tax purposes is £10,000 (up to an income limit of £100,000, at which point the personal allowance is reduced until it is lost entirely at the point at which earnings reach £120,000).
However, if you were born between 6 April 1938 and 5 April 1948 your personal allowance increases to £10,500; and if you were born before 6 April 1938 it is £10,660. In both instances, there is an income limit of £27,000.
In the event that your earnings for the tax year exceed £27,000, but are less than the £100,000 threshold, your personal allowance will be reduced by half of the amount you earn over the £27,000 limit; i.e. your personal allowance is reduced by £1 for every £2 you earn in excess of £27,000 until you reach the standard personal allowance of £10,000.
Therefore, if you earn £28,000 or more (or £28,320 or more in the event that you were born before 6 April 1938) the effect will be that you forfeit the additional, age-related, personal allowance and will receive the standard personal allowance of £10,000 only. In the event that your income exceeds £100,000, your standard personal allowance will be reduced also (as detailed above).
We cannot be certain at this stage what will happen when the personal allowance increases to £10,500, with effect from 6 April 2015. However, it is unlikely that the age-related allowances will increase (no such announcement has been made to date). The Chancellor, George Osborne, has stated his desire to simplify the income tax regime and considers the harmonisation of the personal allowances to be a key component of this. Therefore, I would expect that the issue you have raised will fall away, with effect from 6 April 2015, for those people born between 6 April 1938 and 5 April 1948 and will, in all likelihood, cease to be an issue for those people born before 6 April 1938 in the near future (assuming that the standard personal allowance increases by a further £160).
Q. My wife and I both work fulltime and have two children in nursery. We receive childcare vouchers, through a salary sacrifice scheme operated by our employer, in order to meet some of the costs of that childcare. A colleague has told me that the government has announced that it is to scrap childcare vouchers. Is this correct, as the loss of this tax-break would have a significant detrimental impact upon our family’s finances?
A. No.
Whilst your colleague is correct that the government has announced that it is to phase out the existing, employer-sponsored, childcare voucher system, it is set to replace it with a new tax-free childcare voucher scheme that will be available to all couples where neither parent earns more than £150,000 (the “additional rate” income tax threshold). It is estimated that this will benefit approximately 1.9m families (a significant increase on the estimated 450,000 families that benefit from the existing arrangements), that it will enable thousands of parents to return to work (who are prevented from doing so due to the unaffordability of childcare) and represents a key government policy to support the UK’s economic recovery.
The new scheme, that is intended to be broader and more generous than the existing employer-sponsored voucher system, was announced initially in March 2013 – as part of the Chancellor’s budget speech – and was set to allow families to claim up to £1,200 towards regulated childcarers’ fees through tax-free childcare vouchers. The scheme was to be made available in respect of children aged 5 and under.
However, following a consultation, the Prime Minister, David Cameron, announced recently a number of changes to the scheme. The new scheme has been extended so that families will now be able to claim up to 20% of their childcare costs, up to a maximum of £10,000 per year. Furthermore, whilst the new scheme will apply to children aged up to 5 years old initially, there are plans for it to be extended to cover children up to the age of 12 within one year of its introduction.
The new voucher system – that will be operated jointly by HMRC and the government-owned National Savings & Investments – will be introduced in autumn 2015, seven years ahead of the initial timescale.
Those parents who make use of the existing employer-sponsored schemes, will have the option of remaining in the scheme (for so long as it is operated by their employer) or making use of the new arrangement (but they won’t be able to use both). Employees who are not yet a member of their employer’s scheme will have until August 2015 to join it, if they wish so to do.
Whilst the new scheme has been welcomed by most, it has drawn criticism from some quarters as it prohibits families from applying for the new childcare vouchers if one parent stays at home to raise their children and/or where a parent benefits from tax credits.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
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