Tax and retirement - Income and personal allowance

Once you have adjusted your income in this way, for every £46 by which it exceeds £10,600, the age allowance is reduced by £180. So the standard age allowance is reduced to the normal younger person's allowance as income reaches £27,010 for a married man and £26,866 for a single person.

For people over eighty, their age allowance is reduced to the normal single person's allowance as income reaches £28,869 for a married man and £29, 69 8 for a single person. The effect of this rule is that you pay tax at almost 40% on the income between £29,600 and these limits.

For example, if your income is below £19,600, your tax is worked out as follows:

However, if your income exceeds £19,600, your tax allowance is reduced. The reduction is two thirds of the excess above £10,600. For example, an income of £10,900 is £600 above the limit. Two thirds of £600 is £200, so your tax allowance would be reduced by that amount, making it only £80.

The net income after tax is just £179 more as a result of a £600 rise in gross income. So you pay £189 in tax, making the effective rate of tax nearly 40%. That rate applies to all income between £10,600 and the upper limit for receiving an age allowance.

More information

Tax and retirement - Investment Income

There is a further complexity about working out your entitlement to age allowance if you have income from money invested in a building society, bank deposit account, or in a local authority bond. All these investments now pay the interest net of basic rate tax.
To check whether your income is high enough for you to lose the age allowance, or to receive only a partial one, the Inland Revenue must know the size of your income before you pay tax. This amount is called your gross income. However, interest from a building society, a bank deposit account or a local authority is now paid net of tax, as if you had already paid the tax on it.
So in order to assess your income fairly, the Revenue . . . ... see: Tax and retirement - Investment Income