Personal Allowance Tax Trap

By Miles Burr | 9th January 2020

With the Budget due on 11th March and the UK having a majority Government for the first time in many years, people are starting to look at some of the anomalies in the tax system and wondering if now is a time when things may change.

Whilst most people accept that paying tax is a necessary part of earning income and being part of a society, some of these anomalies look a little antiquated and some feel unfair.

One of these is the removal of Personal Allowance for those earning over £100,000. There is a process in place which causes the gradual removal of the £12,500 tax-free allowance by £1 for every £2 you earn over £100,000. This means that you are paying an equivalent 60% tax on that income slice. If you earn between £125,000 and £150,000, you will still pay income tax at 40 per cent but will have no personal allowance. You will then pay the top rate of 45 per cent on any earnings over £150,000.

This came into place in 2010 and so naturally there are many more people earning over £100,000 than there were when this was introduced. Further to that, the threshold has remained at £100,000 while the Personal Allowance has increased meaning that a greater number of people are caught in this trap.

However, there are solutions that can be considered if you are caught in this position. A Personal Pension contribution can be made which will have the effect of reducing your income for the purposes of this calculation. For example, if you earn £120,000, you could pay a pension contribution of £20,000 – this would not only gain tax relief of 40% on the contribution itself but will also return £10,000 of the Personal Allowance that had been removed due to your salary.

This means that whilst £20,000 has been paid into your Pension Plan, the actual net cost to you could only be £8,000. This because you get 20% basic rate tax immediately (£4,000), you can claim a further 20% tax relief as you are a 40% tax payer (£4,000) and finally, the return of £10,000 worth of Personal Allowance means that money that was being taxed at 40% is now being taxed at zero (a further £4,000 saving). That is the equivalent of 60% Tax Relief.

Other solutions include Gift Aid payments to registered charities. However, all this is something that must be addressed before the end of the Tax Year so if you feel that this may affect you, do please contact us so that we can consider your position and offer some advice.

This anomaly, along with many others, may be addressed on March 11th in the Budget but, if experience is anything to go by, it is more likely that some new ideas will be thought up with further unintended consequences to go with them. We will, of course, be watching the Budget closely and will be providing a brief summary shortly after it happens. In the meantime, if you wish to discuss how the current tax situation affects you, please do contact us.

Recent articles

We live in interesting times. But let us worry about that….

By Tim Benson | 6th September 2019

We have had a new Prime Minster for only a matter of weeks and Mr Johnson has already polarised opinion nearly as much as the topic that has been front and centre of the nation’s thoughts since David Cameron announced the Referendum back in 2016. ‘Brexit’ has become such a familiar term that it has…

Is it the start of the end for Buy to Let?

By Miles Burr | 12th April 2019

For many years investment into buy to let property has generated very good returns as the housing market has risen inexorably and this has clearly attracted many people. However, are we now beginning to see the end in sight for this type of investment? There is clearly a housing shortage and in order to help…

A chance to make a difference as the new Tax Year arrives

By Miles Burr | 12th April 2019

The new Tax Year is upon us and we have a few allowance changes to consider, not least the continued tapering of the Residence Nil Rate Band. This was introduced in 2017, honouring a key commitment in the Tory Manifesto back in 2015 to improve the opportunity of leaving the family home to your children in your will…

Timing the Market or Time in the Market

By Miles Burr | 18th February 2019

Until such time as an investment proposition is created that has all the potential performance of stock market related funds but with the downside risk of a Building Society account, we have to accept that fluctuating stock markets are part and parcel of medium to long-term investing. Whilst market downside volatility creates unease, it is…

The Modern Personal Pension

By Miles Burr | 14th February 2019

Pension Freedoms have now been with us since 2015 although it’s only more recently that many people are starting to recognise that the modern Personal Pension plan can probably describe itself as one of the most tax efficient and flexible investment plans ever! Before 2015, the traditional Personal Pension had strict requirements as to how…

Pound coins

Autumn Budget 2018 – Key Points for Savers & Investors

By Tim Benson | 20th November 2018

Autumn Budget 2018: Key Points for Savers & Investors Income tax Personal Allowance will be increased to £12,500 on 6 April 2019 for the 2019-2020 tax year. The threshold above which higher earners start paying 40% tax is being increased to £50,000. These allowances will remain the same for 2020/21 and then increase in line…

Hands linked together

The Value of Financial Advice – Independent Research that supports our work

By Tim Benson | 18th July 2018

We work closely with our clients to help them achieve their financial objectives. We have always believed in the value of good financial advice and it is encouraging when independent research supports our opinion. The International Longevity Centre recently produced some research, they are a charitable organisation focusing on some of the biggest challenges facing…

Young family outside house

The Residence Nil Rate Band

By Tim Benson | 18th July 2018

One of the key commitments in the Tory Manifesto back in 2015 was the ability to leave the family home to your children in your will without it incurring Inheritance Tax. The Government recognised that property price increases had pulled many more people into the Inheritance Tax net than before. The aim, therefore, was to introduce…

Coins in a budget jar

There may be no Budget, but we still get allowance changes

By Tim Benson | 18th July 2018

March commences and we have the traditional daffodils appearing, clocks will be going back and the final push of snow disappears as the ‘Beast from the East’ slips away. But, it seems that one of the March traditions has ceased for the time being as the Treasury have confirmed that the Spring Budget will be…

Employee Benefit Solutions Ltd. - Logo

Employee Benefit Solutions Ltd.

St. Johns House,
18 St Johns Road,
HP10 8HW

T: 01494 817161

Personal finance society logo

Authorised and regulated by the Financial Conduct Authority.