Over a million British taxpayers will face being caught in a tax “trap” in 2018-19, as their income exceeds £100,000 and they lose the benefit of their tax-free allowances.
Once an individual has taxable income above £100,000, they lose their tax-free personal allowance, which pushes their marginal tax rate to 60%. The number of individuals who are caught in the “tax trap” has
increased by a third since the coalition government came into power. The figures have risen from 588,000 people in 2010-11 to an estimated 791,000 in 2014-15, according to official figures. If the current pattern continues, the numbers will rise to over a million by 2018-19.
According to experts, the situation occurs as the amount of personal allowance received is reduced when income exceeds £100,000. It is reduced by £1 for every £2 of income above the threshold, which means that an extra 20% tax is charged. Income above £42,385 is charged at the higher rate of 40%, while the lost personal allowance of £10,000 results in an extra 20% being charged on the portion of income between £100,000 and £120,000.
According to a tax director from Deloitte, Patricia Mock, the amount of income that is liable to the 60% marginal rate has increased along with the personal allowances. In 2017-18, the personal allowance will increase to £11,000, which will increase the 60% band to £122,000. Experts advise that those who are facing the 60% marginal rate to consider tax planning to minimise the effects on their income.
There are a number of strategies that allow you to minimise tax in a legitimate manner. For those individuals with income just below the threshold of £100,000, making investments to attract capital growth, which is taxed at 28% if an individual is a higher rate taxpayer, is an attractive option. However, risks should be considered carefully before investing capital.
Individual Savings Accounts let you invest up to £15,240 per annum during 2015-16 without paying tax on the interest earned.
The annual allowance has been reduced to £40,000 for 2014-15 onwards. However, tax relief on pension savings is given at the marginal rate of tax, which for those with income above £100,000, is 60%. This results in £1,000 being invested into the pension pot at a net cost of just £400.
For more advice about tax planning and bookkeeping, contact us at The Accountancy Partnership.
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