Age Allowance Calculator - work out whether you are entitled to the full age-related personal allowance.
This calculator works out whether you are entitled to the full age-related personal allowance for income tax purposes.
Age Allowance is an enhanced (but often forgotten) income tax personal allowance available to those aged over 65.
If you are aged 65 or over, your personal allowance is £10,500 in the 2013/2014 tax year. This increases after age 75 to £10,660 in the current tax year. For an individual aged over 75, this could mean an income tax saving of up to £244.00.
Is this available to everyone?
Not quite. The full entitlement is only available where your total income for the tax year is below a certain amount (£26,100 in the current tax year). Your age allowance is reduced by £1 for every £2 by which your total income exceeds this threshold, until it drops back to the standard personal allowance.
For those caught within this narrow band, this means that they are being taxed at a rate that effectively falls between the basic and higher rate.
What can you do to reduce this?
If you are receiving a fixed income from an annuity or occupational pension scheme, there is little you can do (although continuing to make contributions to a personal pension may be an option).
If a significant part of your income derives from non-pension investments (such as Deposit Accounts or a Unit Trust or Securities Portfolio) then it is possible to fine-tune the actual amount of income that you receive.
One useful tactic is to take income from PEP and ISA plans. Many people have built up significant holdings over the years in these tax-privileged accounts, and once they retire, the investments held within these plans can be restructured to provide an emphasis on providing a regular stream of income. You should also consider some tax-free National Savings product, such as Index-Linked Certificates.
This calculator includes a field for entering any Chargeable Gains incurred through the encashment of investment bonds. The use of investment bonds by investors can have a significant impact upon their age allowance, both in a positive and negative ways.
Investment Bonds are collective investments products with similarities to unit trusts and investment trusts, but with the major difference that these are written under Life Insurance legislation, and are in form (if not entirely in substance) life insurance policies. The Life Insurance element of these products is generally minimal (usually 101% of the value of the investment), with the majority of the original investment applied to investment funds.
Part of the appeal of Investment Bonds is the ability to take tax-deferred withdrawals of up to 5% of the original investment each year. Obviously this can benefit retired investors who are hovering around the age allowance threshold, because income taken by way of withdrawals is treated as a return of capital and not taxable.
However, if an investment bond is surrendered or assigned for money, the Life Office performs a chargeable event calculation and a Chargeable Event Certificate is sent to the policyholder. Whilst there is often no additional income tax payable on the gain for basic-rate taxpayers, any investor who is pushed into the higher rate tax band solely due a Chargeable Gain can take advantage of the Top-Slicing facility (for more information on this topic, see the Investment Bond Calculator
page). However, even if this is the case, many people overlook the fact that there could be a significant impact upon an individual's age allowance.
This is because the whole gain, not just the Top-Sliced gain, is added on top of an individual's income to determine whether they are still entitled to the full age allowance.
Mr X has income of £22,000 in the 2013/14 tax-year.
During the year he surrenders an investment bond that he has owned for ten years, and the chargeable gain is £10,000.
To determine whether there is any additional income tax liability, the gain is divided by ten years, and this gives a Top-Slice of £1,000.
When added to Mr X's income, because he still remains within the basic-rate band, he has no additional income tax liability.
If we add the gain of £10,000 to his income, this gives a notional income of £32,000 for Age Allowance purposes. This takes him £5,900 above the Age Allowance threshold, and will cost him his entire Age Allowance, which is now reduced back down to the standard personal allowance. He has lost £1,060 of Age Allowance, which means an additional £212 of income tax is payable on his income that year.
Is this avoidable? Possibly with some careful forward planning. Mr X could have chosen to wait and surrender the investment in a year when he has less income. For many people this may be impractical (because they receive a fixed or index-linked pension), so it is worth checking whether the Investment Bond was issued as a number of segments. By surrendering individual segments over a number of tax years, any negative tax consequences may be reduced.
It may also possible for Mr X to assign segments to his wife in order to take advantage of his wife's allowances (assuming that the bond is not already in joint-ownership).
You can enter Chargeable Gains into the calculator to work out the effect that this can have on your age allowance.
In a similar vein, those considering cashing in a pension fund risk not only losing their age allowance, but their entire personal allowance.
For every £2 earned over £0, your personal allowance reduces by £1 until it is completely removed. This means that the proportion liable to higher-rate tax increases.
Therefore, care should be taken if you are considering taking your entire pension fund as a lump sum, as this could inadvertently trigger a large (and possibly unexpected) higher rate income tax liability. If you are considering such an option, you should take a look at our Flexi-Access Drawdown Tax Calculator
The figures projected by the calculator are only for guidance purposes - whilst we aim to ensure the accuracy of our calculators, we can take no responsibility for the usage made of the calculations generated on this site.