For every £2 that your income exceeds £100,000, your
personal allowance will be reduced by £1. The reduction is progressive and means that once your income exceeds £125,140 your personal allowance of £12,570 will be reduced to zero.
As
taxpayers with income in the range £100,000 to £125,140 are paying tax at 40%, the gradual loss of the personal tax allowance means that the effective rate of tax in this range is 60% not 40%. Someone with total income of £100,000 that does not include any dividends and no allowances or reliefs other than the personal allowance will have a tax liability of £27,432. Someone with income of £125,140 will have a
tax liability of £42,516. For an increase in income of £25,140 the tax bill has risen by £15,084, which is 60% of the additional income.
The figures are slightly different if dividend income is involved as different tax rates apply, but the principle remains the same.
If you are affected by this process, tax planning to reduce your income below the £100,000 threshold could be a very cost effective option. This may involve consideration of pension top-ups, payments to charity under
gift aid, deferring income where this is possible, or sacrificing salary for additional holidays or other
benefits in kind. Other tax planning options may also be available to you.
Please contact us so we can help you consider your tax planning options.