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 must work out what your gross income, before tax, would have been if the interest had been paid to you gross.

This process is called `grossing up'. To work out your grossed-up income you need to multiply the net income by 1.66 (to be exact, you divide by 0.79 ).

Suppose that your net income from the building society is £100.

Then your grossed-up income is £100 x 1.66 = £166.

You can see that figure is right by working out the tax due on £166. The tax due on £166 is £166 x 89 % = £66, leaving a net income of £100. So you need £166 to give you the same net income as the £100 you get from the building society.

It is this grossed-up income you must use to see if you are entitled to a full age allowance or not. Of course, it is only income paid net of tax which you have to gross up in this way.

Read - Example State Pension

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Example State Pension

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