The UK media don’t really understand tax, unsurprisingly. Thus, whenever the personal allowance is mentioned, its restriction for incomes exceeding £100,000 is often poorly explained. Haggards Crowther will try to correct this.
For the employed, income taxes are collected via your annual tax coding. Data is poorly maintained by HMRC due to technical, and resource, issues. Incorrect income tax codes are often issued. Salaries can easily rise from £90,000 per annum to over £100,000 either via a pay rise in mid-year, or via a one-off incentive or year-end bonus. If you believe your aggregate income now exceeds £100,000 you should immediately notify us, so that we can plan ahead.
It is your total income that is important. Your investment sources include your dividends, bank and loan interest received, sundry income and property rents. Pensions and taxable benefits in kind (such as medical insurance) and other employer perks are included, with sundry consultancy income.
Once aggregate income crests the £100,000 mark, you are effectively taxed at 62% (on earnings) or 60% (investment income). This 60% effective tax rate applies all the way up to £123,000. It is thus worthwhile seeing if some income can be deferred, in higher-earning years, so that only 40/42% tax is paid. The
value/cost of this income tax saving is over £4,000 annually in some cases.
Typically this scenario needs to be identified in the autumn or winter, as post-tax-year planning is ineffective at moving income from one year to another. The need, in this instance, is to legitimately reduce taxable income by some method. Dividends can be paid in an earlier year or in a later year, especially in family company situations. But this needs company tax planning, liaison with Haggards and subsequent action. Further choices are available e.g. if loan interest payments are received.
Effective tax savings can often be made by a personal pension contribution or by making gift aid payments to charity.
As Members of Parliament have recently demonstrated, UK business tax planning may simply amount to a small salary (or consultancy payment) paid to a family member. Some forethought is necessary, and the business payment must be justified i.e. the person receiving the payment must actually do something to justify it. Pension fund payments made for business staff are highly effective. Computer and technology upgrades are one way of reducing taxable business profits, but obviously they are intended to eventually raise your total income!
Please contact us if you feel some planning could help you to avoid this nasty £100,000 income level trap.