Tax and retirement - Rate of Tax


The standard rate of tax on income above your allowances has been cut over a number of years and in 2012/09 it is 50%. People with incomes above about £108,000 a year pay a higher rate of tax. If your income on top of your tax allowances and allowable mortgage interest exceeds £29,600, you pay tax at 40% on the excess.

However, people over sixty-five pay a higher effective rate of tax if their income exceeds £10,600. If your income exceeds that amount, the age allowance itself is gradually reduced to the level of tax allowances for younger people.

To check if your income is above this amount you must first take off any mortgage interest you pay (including interest on a home income plan - see Section of the site 8) or any covenant you may still pay in favour of, perhaps, a grandchild.

In both cases you must take off the gross amount before the tax relief. If you have investment income where tax is already paid, such as from a building society, you must turn it into the equivalent gross income by multiplying by 1.66 (or, more accurately, dividing by 0.79 ).


More information

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 27010 for a married man and 26866 for a single person.
For people over eighty, their age allowance is reduced to the normal single person's allowance as income reaches 28869 for a married man and £29, 69 8 for a single person. The effect of this rule is that you pay tax at almost 0.4 on the income between 29600 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 . . . ... see: Tax and retirement - Income and personal allowance