For high earning taxpayers the personal income tax allowance is gradually reduced by £1 for every £2 of adjusted net income over £100,000 irrespective of age. Adjusted net income is total taxable income before any personal allowances, less certain tax reliefs such as trading losses and certain charitable donations and pension contributions.
Adjusted net income between £100,000 and £123,000 creates an effective marginal rate of tax of around 60% for tax payers as the £11,500 tax-free personal allowance is gradually withdrawn. Taxpayers whose income sits within this band should consider any financial planning opportunities that may be available to them in order to avoid this personal allowance trap. This can include giving gifts to charity, increasing pension contributions and participating in certain investment schemes. These strategies also apply to higher rate and additional rate taxpayers looking to reduce their tax bills.
For example, a higher rate or additional rate taxpayer who wanted to reduce their tax bill for the last tax year, could decide to make a gift to charity in the current tax year and then elect to carry back the contribution to 2016-17. A request to carry back the donation must be made before or at the same time as the 2016-17 self-assessment return is completed. The deadline for filing a paper tax return has now passed, but the online deadline of 31 January 2018 means that for some taxpayers there is still time to act.
The option to use increased pension contributions should also be considered but the allowance is tapered for taxpayers whose income exceeds £150,000, and there are also lifetime limits for pension contributions after which tax relief is no longer available.
If you estimate that your income will breach this £100,000 limit, perhaps for the first time, we would recommend that you take professional advice. Please call so that we can help you consider your options.