There is an effective tax rate of up to 60 percent that exists for individuals earning over £100,000.
Where someone has earnings over £100,000, their personal allowance (the amount that may be received in a tax year before any tax is due) is reduced by £1 for every £2 over the threshold.
An expert has suggested one of the main ways to protect oneself against this is via salary sacrifice.
Sarah Hollowell, Tax and Trustee Services Director at Killik & Co said: “There are ways to protect against the 60% effective tax rate. First off, is via salary sacrifice. The individual would need to ask their employer to reduce their salary (by the amount over £100,000).
“The employer would then put the difference into their pension. As the taxable salary would be lower, less national insurance would be payable so it wouldn’t just be an income tax saving.
“Where someone isn’t an employee or if a salary sacrifice arrangement isn’t available, then a personal pension contribution equivalent to the amount over £100,000 may be made instead.”
Personal pension contributions attract higher rate tax relief – the basic rate relief is given by the government topping up the contribution (so to reduce taxable income by £10,000, the taxpayer would only need to make a personal contribution of £8,000) and the remaining relief is claimed via self-assessment.
It should be noted that contributions via a salary sacrifice arrangement are treated as employer contributions.
Both options mean the individual’s taxable income remains below the threshold so their personal allowance remains intact.
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The personal allowance is currently £12,570 so someone with income during the current year of £110,000 would have their personal allowance reduced to £7,570, meaning that £5,000 more of their income is taxed at 40 percent.
And once an individual’s income reaches £125,140, they will lose the personal allowance completely.
Ms Hollowell, Tax and Trustee Services Director at Killik & Co. explained that this can be an unexpected surprise, especially when a taxpayer has received a bonus or a salary increase that pushes them over the £100,000 threshold.
She said: “Where all or most of the taxpayer’s income comes from their salary, the extra tax due will be collected via PAYE. However, if someone has other taxable income that takes them over the £100k limit, the extra tax will need to be collected via self-assessment.
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“This can cause problems, particularly where someone has a buy-to-let property and they’ve put aside 40 percent of their net rental income to meet their tax bill.
“It’s not just a person’s earnings that can push them over the threshold whereby the personal allowance is tapered or lost. All other taxable income is taken into consideration.“
With increased interest rates (and reduced dividend allowances), more people could have a tax liability on their savings or investments. The tax hit can be reduced by making use of the annual ISA allowance.
Additionally, she explained that if someone is married and one spouse has a higher income than the other, they can consider transferring investments into the name of the lower earner.
They can do this not just to make the best use of lower tax rates but to help preserve the personal allowance.
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