For high earning taxpayers, the personal allowance is gradually reduced by £1 for every £2 of adjusted net income that exceeds £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.
This means that for the current tax year, an adjusted net income between £100,000 and £123,700 creates an effective marginal rate of tax of around 60% for tax payers. Taxpayers whose income sits within this band, should consider if planning opportunities are available to them 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 wants 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 2017-18. A request to carry back the donation, must be made before or at the same time as the 2017-18 Self-Assessment return is completed. The deadline for filing a paper tax return has now passed, but the online deadline of 31 January 2019 means that for taxpayers who have not yet filed their 2017-18 return, there is still time to act.