Changes to personal allowances
At a glance changes, including examples
Personal allowance for higher rates – 2023/24
We are sharing this update from ACCA, our professional body, for the interest of clients and contacts. The content is (c) ACCA
We know that the personal allowance is frozen for 2023/24 at £12,570. If you have an annual income exceeding £100,000 you will have lost £1 of your personal allowance for every £2 of income above £100,000. This is unchanged.
The government announced that it will decrease the additional rate threshold from £150,000 to £125,140 from 6 April 2023. This is the threshold where the entire personal allowance is lost.
The loss of the personal allowance means a person is taxed at 40% on the additional £2 of income, and they also pay an extra 40% on the £1 of personal allowance lost. This results in a marginal rate of 60%, which continues up to £125,140 (£100,000 + (£12,570 x 2)). At the £125,140 point the entire personal allowance has been lost.
Current year 2022/23 and 2023/24
For the current year 2022/23 and 2023/24 the personal allowance is removed at £1 of the personal allowance for every £2 of income above £100,000. This results in the marginal rate of 60%, which continues up to £125,140.
To provide an example, Joe has an income of £115,000 in both years. As Joe earns £15,000 over £100,000, he loses £7,500 of his personal allowance (£1 of personal allowance for every £2 of income over £100,000), leaving only £5,070 of personal allowance.
The personal allowance loss of £7,500 gives rise to extra taxable income (at 40%) meaning that Joe pays £3,000 (£7,500 at 40%) more income tax on top of the £6,000 due on the £15,000. Therefore, the total of £9,000 income tax resulting from the extra £15,000 income in excess of the £100,000 threshold gives an effective tax rate of 60%.