Lost Personal Allowance
Did you know that there is a band of income, between £100,000 and £125,140, when your income in this band is effectively taxed at 60%!
If your income for the current tax year looks as if it will fall into this band (£100,000 to £125,140) it makes sense to investigate ways to minimise this excessive tax charge and keep more of your money in your pocket.
Here’s why the tax charge is 60%
In this band (£100,000 to £125,140), not only are you paying the 40% higher rate of income tax, but for every extra £2 earned over £100,000 you will lose £1 of your tax-free personal allowance. In effect, you will be taxed on an additional £1 that would have otherwise been tax-free.
The result is that for every £2 of income earned in this range, you pay 40% tax on that £2 (so £0.80), and also an additional 40% on the £1 you lose from your personal allowance (another £0.40). Effectively, you're paying £1.20 in tax on £2 of extra income, or 60%.
This process means that once your taxable income exceeds £125,140 you will no longer have a personal tax allowance.
Ideas to minimise this loss of personal allowance
The only way to avoid this loss of allowance is to reduce your taxable income. You could consider a number of the following options but please get professional advice before taking any action:
- Make pension contributions.
- Make charitable donations (Gift Aid).
- Consider a salary sacrifice arrangement with your employer. Would need to be for non-cash benefits such as employer pension contributions.
- If part of your income is interest on investments you could consider transferring these investments to your spouse.
- Switch investments into tax efficient products such as ISAs.
- If this year’s bonus is the item pushing your income over £100,000 could you defer receipt of the bonus until the following tax year when your income might be lower.
If you find yourself in this 60% tax bracket please call so we can consider your options. The time to take a look is now, while there is still time to act before the end of the current tax year, 5 April 2025.
