TXF6 UK
Syllabus B. Income Tax And Nic Liabilities B5. The comprehensive computation of taxable income and income tax liability

B5b. Personal allowance

Syllabus B5b)

Calculate the amount of personal allowance available.

What is a personal allowance?

Personal allowance

is an amount on which income tax will not be charged. 

If an individual makes income above this allowance amount, then income tax will be charged on that additional income and the relevant rates.

Calculation of the personal allowance

For the tax year 2018/19 the personal allowance is £11,850 but it is reduced if the taxpayer has adjusted net income for the year in excess of £100,000.

If the adjusted net income exceeds £100,000 then the personal allowance is reduced by ½ of the excess of £100,000.

Therefore, the personal allowance is reduced to Nil if the adjusted net income is £123,700. (£123,700-£100,000)/2 = £11,850.

How to calculate Net income and Adjusted net income?

Net income = Total income – qualifying interest payments – trading loss reliefs.

  • Adjusted net income = Net income – gross personal pension contributions - gross gift aid contributions.

How does this all look?

Total income X
Less:
Trading loss reliefs (X)
Qualifying interest    (X)
Less:
Personal allowance (X)
Taxable income       X

Illustration:

Bubble has net income of £103,150 and has a gross personal pension contribution of £2,000.

  • How much personal allowance will she be entitled to?

  • What is her taxable income?

Solution:

Adjusted net income = £103,150 - £2,000 = £101,150

Personal allowance reduction

£101,150 - £100,000 = £1,150 / 2 = £575

  • £11,850

    (£575)

    £11,275 is the personal allowance available to Bubble

Total income
Net income £103,150
Personal allowance (£11,275)
Taxable income £91,875