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New tax year begins – tax rates and allowances

How changes from the Budget 2012 will affect you

Your tax-free allowance rises to £8105 for 2012-13

With the new tax year starting on 6 April 2012, Which? Money shows you what’s changing and how your personal finances will be affected in the 2012/13 tax year. Today, we explain changes in tax rates and allowances.  

Tax rates and allowances – what’s happening

Tax rates remain unchanged for 2012-13, but there are new tax-free allowances and tax thresholds: 

  • Basic rate tax stays at 20%, Higher rate tax is 40% and Additional rate tax is 50%. The big change in tax rates – cutting additional rate tax from 50% to 45% – won’t happen until 2013-14, so rates don’t alter until April 2013.
  • The Higher-rate tax threshold is lower in 2012-13 than it was in 2011-12, so more people will pay tax at 40%. At the same time, tax-free personal allowance is increased, from £7,475 to £8,105, so basic rate taxpayers will be better off, by £126 a year.
  • Age-related allowance (the means-tested tax-free amount for older people) is rising in 2012-13, too. For those aged 65-74 it is rising from £9,940 to £10,500 and for those aged 75 and above it rises from £10,090 to £10,660.

Tax rates and allowances – how it will affect you

Changes in allowances will affect you differently, depending on your circumstances:

  • If you are aged under 65 and a basic rate taxpayer, you will keep more of your income tax-free and should be £126 a year better off. 
  • If you are under 65 and earn over £42,475 you will pay 40% tax on some of your income. The first £8,105 is tax free. The next £34,370 is taxed at 20% and 40% tax is charged on anything over this until you reach £150,000. Above £150,000 you are taxed at 50%. At £100,000 you start to lose personal allowance, at the rate of £1 for each extra £2 income, so by £116,030 you receive no allowance but pay tax on all your income.   
  • If you are aged 65-75, your tax-free personal allowance for 2012-13 is £10,500. Income above this is taxed at 20%, until you reach the higher tax (40%) threshold. If your income is over £25,400, you start to lose age-related allowance however, at the rate of £1 for every extra £2 income. If your income is £30,190 or more you get no age-related allowance but will still keep £8,105 tax-free.
  • If you are aged 75 or over, your tax-free personal allowance for 2012-13 is £10,660. If your income is over £25,400 you start to lose age-related allowance, however, until you earn £30,510, then you are only entitled to standard personal allowance of £8,105.        

Tax rates and allowances – changes announced in the Budget 2012

Some big changes announced in the 2012 Budget do not come into force until 2013-14.  

  • Additional rate tax will fall from 50% to 45%. This is the ’50p tax cut’ for those who earn over £150,000 a year. 
  •  Personal allowance will rise, from £8,105 to £9,205
  • The infamous ‘granny tax’ will see age-related allowance frozen at 2012-13 levels for those who receive it. From April 2013, there will be no extra allowance for those born after 6 April 1948.  

Tax rates and allowances – how to take action

For most people, the main task is to check that you are receiving the correct allowances and paying tax at the right rate. Your personal allowance is reflected in your tax code, so it’s important to check this each year and query any irregularity. You may get reduced allowance if you owe tax from previous years.

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