Elderly person’s quick guide to tax
Tax can be very confusing, so here’s quick guide to help you help your elderly parent through the tax minefield:
Not all income counts towards Income Tax
The tax rules are not necessarily the same as those for benefits or local council services. You may have to pay tax on:
• Income from employment or self-employment
• Pensions, including State Pension, and annuities (except pensions administered under the War Pensions Scheme and Armed Forces Compensation Scheme)
• Interest from savings accounts
• Dividends from investments
• Income from lettings
• Some benefits, such as Incapacity Benefit and Employment and Support Allowance (they can be taxable or non-taxable)
You do not have to pay tax on:
Pension Credit
Lottery or premium bond wins (or any other gambling wins)
Winter Fuel Payments
Attendance Allowance/Disability Living Allowance
Pensions administered under the War Pensions Scheme
and Armed Forces Compensation Scheme
Industrial disability
Individual Savings Accounts (ISAs)
Some National Savings and Investments products
HMRC can provide further information about which types of income are taxable
and which are non-taxable
You don’t have to pay Income Tax on capital
This is only payable on the interest, or income it generates
If your ageing parent puts it in a savings account and starts to get 3 per cent interest, that interest will be taxable
However, the lump sum may affect your parent’s entitlement to benefits, such as Pension Credit
Should your ageing parent be paying tax?
Everyone has a personal tax-free allowance (unless your parent’s income exceeds £100,000, when they begin to lose the allowance at a rate of £1 for every £2 in excess)
If their total taxable income is greater than their personal allowance (PA), then they will have to pay some tax
If not, they are a non-taxpayer
Their PA depends partly on their age
In 2014/15 the levels for PA are
- Born after 5 April 1948 you have the basic PA of £10,000.
- Born after 5th April 1938 but before 6th April 1948 you have a higher PA of £10,500
- Born before 6th April 1938 you have £10,660
Notice the age definitions above. The higher allowance kicks in at the beginning of the tax year in which you became eligible, not on the date of your birthday. Importantly note that age related allowances have been frozen with effect from April 2013 until the basic personal allowance catches up
Note that the PA depends partly upon your age. This is because if your income exceeds a certain threshold, then you start to lose the age-related part of your PA at the rate of £1 for every £2 by which your income exceeds the threshold. This year that threshold is £27,000. So if your income were, say, £28,000, that is £1,000 over the limit, then you would lose £500 worth of your age allowance. So instead of £10,500 at age 67, you would only get £10,000. This steady withdrawal continues until you are back to the basic personal allowance of £10,000. It never sinks below this (unless your income exceeds £100,000).
The Blind Persons Allowance (BPA)
Blind person’s allowance is £2,230 in 2014/15. It means that the person receives an extra £2,230 of tax-free allowance. It is not given automatically and must be claimed once you have registered with your local authority. Importantly any unused part of the BPA can be transferred to the spouse or civil partner of the claimant if their income is insufficient to make use of the allowance. The eyesight of the other partner is irrelevant.
In England & Wales a person must be referred by their GP to a consultant ophthalmologist who will apply certain HMRC tests. If these are satisfied, the consultant will provide a severely sight impaired (SSI) certificate (you do not have to be completely blind) which is then given to the person’s local social services allowing them to register as blind. Only then can they inform the tax office, quoting that number and receive BPA. The helpline for this is 0300 200 3301. The allowance is given in full and not restricted if registration is part way through the year.
In Scotland and Northern Ireland being registered blind means not being able to undertake any work for which eyesight is essential and a claim for BPA is made direct to HMRC on the helpline number.
On becoming registered blind (SSI) the individual will be able to claim the BPA for the tax year prior to registering providing the evidence for being blind (SSI) was obtained in that previous tax year. If you fail to claim the allowance promptly it can be backdated. The tax system presently allows for claims to be backdated for 4 years, meaning that a claim for 2010/11 must be made by 5th April 2015.
Married Couple’s Allowance
Your ageing parent can only claim the Married Couple’s Allowance (MCA) if they are a married couple or civil partners and one was born before 6 April 1935
Unlike Personal Allowance and Blind Person’s Allowance, MCA does not increase the tax-free allowance, but is deducted from your parent’s tax bill
In actual terms, it’s worth 10 per cent of its face value, i.e. their bill will be reduced by 10 per cent of the amount of the MCA
In 2013/14 the MCA is given at £7,915, which in practice means that up to £791.50 is taken off the tax bill
For couples who married before December 2005, the MCA is given to the husband in the first instance
For couples who qualified after that date, the MCA is given to the higher earner
The other spouse/partner has the right to ask for some of the allowance to be apportioned to them
If the first person’s total tax bill is less than the full amount of the MCA, any remaining allowance can be transferred to the other person to reduce their tax bill, if he or she is a taxpayer
There may be other ways in which couples can try to make their financial arrangements more tax efficient, for example, by putting savings into one person’s name to take advantage of any unused tax-free capacity
