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.