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2011 Finance Act Income Tax and Allowances

There were no surprises in the Finance Act 2011 regarding income tax rates or allowances. As previously announced, the personal allowance for people under age 65 increased to £7,475 from 6 April 2011. To ensure that the increased allowance targets help on the less well off, the threshold at which the higher rate starts has been reduced to £35,000. For the better off, this reduction will increase the amount of income taxed at the higher rate, cancelling out the benefit from the increase in the personal allowance.

Other allowances and thresholds were uprated in line with price inflation up to September 2010. Age-related allowances increased to £9,940 (65 to 74) and £10,090 (over-75s). The limit at which the higher age-related allowances start to be lost increased from £22,900 to £24,000.

The personal allowance continues to be reduced for people of all ages with income over £100,000 a year (£1 of allowance is lost for each £2 of income over the £100,000 threshold), and additional-rate tax will continue to apply for earnings over £150,000. The government insist that the 50 per cent additional-rate tax band is a temporary measure and that the aim is to abolish the rate once government finances improve.

Pension Contribution Limits

The lifetime limit for pension benefits remains at £1.8 million in 2011-12 but will be reduced to £1.5 million in April 2012. Those likely to be caught out by this change can apply for ‘fixed protection’ up to 5 April 2012, although they will then be unable to make further contributions to their pension savings. The trivial commutation rate, which was formerly set at 1 per cent of the lifetime limit, will remain at £18,000 when the lifetime limit is reduced.

The repeal of the complicated restrictions on pension contribution tax relief due to come in from 2011-12, and its replacement by a restriction of the annual allowance to £50,000, has also been confirmed. It is possible to carry forward unused amounts from previous years for up to three years. One amendment added to the Finance Act is that charges for exceeding the limit will be able to be taken directly from the individual's pension fund. For final-salary schemes, the deduction will be reflected in the valuation placed upon the fund in the year the deduction is made.

- Update by John Bloxham - independent tax expert for Tax Guide UK.

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