Personal allowances

This article is relevant to candidates sitting Paper F6 (CYP), and is based on the tax legislation applicable to the tax year 2013

Personal allowances appear regularly in the Paper F6 (CYP) exam. However, such questions are not answered as well as would be expected. The mostly frequently encountered problem is that candidates struggle to differentiate between allowable expenses and personal allowances. It is important that candidates ensure that they appreciate the difference between these as part of their preparation to sit the F6 (CYP) exam.

While this article is not intended to cover every aspect of personal allowances, it does look at the most commonly examined aspects.

Personal allowances are the final deductions from an individual taxpayer’s net income in arriving at their taxable Income. Candidates should note that the old age allowance and spouse allowance were abolished effective from 1 July 2002 and thus are not examinable. Furthermore, the child allowance was abolished from 1 January 2003 and so is also not examinable.

Since the tax year 2003, the following personal allowances are deductible when calculating a taxpayer’s taxable income:

  • Contributions to the social insurance fund
  • Contributions to an approved provident fund
  • Life Insurance premiums
  • Contributions to an approved medical scheme


As stated above, the personal allowances are the final deductions from a taxpayer’s net income. Candidates should be aware that they are subject to certain restrictions and are not always fully deductible.

The following restrictions must be considered when calculating the personal allowances available to a taxpayer:

  • Premiums on life insurance policies in respect of the life of the taxpayer’s spouse are not given as an allowance to the taxpayer.
  • Life insurance premiums are restricted to 7% of the capital sum assured.
  • Premiums on cancelled life insurance policies are recaptured as taxable income if the life insurance contract is cancelled within six years of the date it was first entered into. The amount recaptured as taxable income is as follows:
    • 30% of the total premiums claimed as an allowance if the cancellation is made within three years, and
    • 20% of the total premiums claimed as an allowance if the cancellation is made in the fourth, fifth or sixth year.
  • The total personal allowances cannot exceed 1/6th of the taxpayer’s net income.
  • Any surplus personal allowances are lost, as they cannot be carried forward to be utilised in the future nor can they be transferred to any other taxpayer.


The following examples are designed to help test your understanding of the above rules.


Example 1

Mr Panicos took out the following life insurance policies in 2013:

  • Policy 1: on his life, with an annual premium of €2,000 (The sum assured is €35,000).
  • Policy 2: on his life, with an annual premium of €2,000 (The sum assured is €25,000).
  • Policy 3: on his wife’s life, with an annual premium of €2,000 (The sum assured is €45,000).

Required:
Calculate the life insurance premiums allowable as personal allowances for Mr Panicos in 2013.

Solution
Mr Panicos – Calculation of life insurance premiums allowed as personal allowances:

  • Policy 1: Premium allowed €2,000
    Lower of:
    • Premium paid – €2,000
    • 7% of the capital sum assured – 7% x €35,000 = €2,450
  • Policy 2: Premium allowed €1,750
    • Premium paid – €2,000
    • 7% of the capital sum assured – 7% x €25,000 = €1,750
  • Policy 3: No premiums are deductible as a personal allowance for Mr Panicos as the life insurance policy is in respect of his wife’s life.


Example 2

Mrs Penelopi cancelled a life insurance policy in 2013. The policy was taken out in 2011, and Mrs Penelopi has claimed personal allowances in respect of the policy premiums of €3,000 per annum. in the tax years 2011 and 2012.

Required:
Calculate the life insurance premiums to be recaptured as taxable income in 2013.

Solution
As the cancellation of the life insurance policy was made in the third year from the date of issue of the life insurance policy, an amount equal to 30% of the premiums claimed as personal allowances will be recaptured as taxable income in 2013.

The amount to be recaptured is therefore €1,800 ((2 x €3,000) x 30%).


Example 3

Mrs Eleni received gross employment income of €25,000 in 2013. She also made a donation to an approved charity of €1,000 in the year.

Required:
Compute Mrs Eleni’s taxable income for 2013


Solution

  

Employment income

25,000

  

Less: deductions

   

Donation to an approved charity

(1,000)

  

Net income

 

24,000

 

Less: Personal allowances

   

Social insurance contributions (6.8% x €25,000)

(1,700)

  
 

(1,700)

  
Restricted to 1/6th of net income
(1/6 x €24,000 = €4,000)
 


(1,700)

 
  

22,300

 

Tutorial note:
The personal allowance is the last deduction, and is restricted to 1/6th of net income.


Example 4

The taxable net income of Mr Papadopoulos Kostas in the tax year 2013 is €35,000.

Mr Papadopoulos Kostas paid social insurance contributions of €3,400 in 2013. In addition, he paid a premium of €5,000 in respect of an insurance policy on his life with an insured amount of €55,000, and a premium of €3,000 in respect of an insurance policy on his wife’s life, which was signed in 2011. Finally, he contributed €1,000 to an approved provident fund.

Required:
Calculate the taxable income of Mr Papadopoulos Kostas for the tax year 2013.


Solution

  
Net income 

35,000

 
Less: Personal allowances   

Social insurance contributions

(3,400)

  

Life insurance premiums on a policy on his life (€5,000 – restricted to 7% of €55,000)


(3,850)

  

Life insurance premium in respect of his wife’s life (not deductible)

0  

Provident fund contributions

(1,000)

  
 

(8,250)

  
Restricted to 1/6th of net income
(1/6 x €35,000 = €5,833)
 

(5,833)

 
  

29,167

 

Written by a member of the Paper F6 (CYP) examining team