The 60% Income Tax band

According to HMRC the highest rate of Income Tax is 45%. This will apply to anyone with income over £150,000. Income below this amount is taxed at 40%, or a combination of 20% and 40%.

However, if your income marginally exceeds £100,000, for every £2 your income exceeds this amount you will lose £1 of your personal tax allowance. For a person under 65 years the personal allowance for 2013-14 is £9,440. Consequently, if your income rises to £118,880 you will lose your personal allowance.

 The tax payable on this marginal amount of £18,880 is £18,880 x 40% plus £9440 x 40% – in total £11,328, or 60% (11,328/18,880 x100) of your income earned between £100,000 and £118,880.

 If you estimate that your income will marginally exceed £100,000 in this tax year you may be advised to consider your options. There are two strategies you could employ:

  1. Reduce your income, or
  2. Increase your tax allowable deductions

 Reduce your income:

  • You could discuss a salary sacrifice arrangement with your employer: exchange salary for unpaid leave or a combination of tax free benefits.
  • Defer bonuses and/or dividends payable towards the end of the tax year until after 5 April 2014. Depending on the numbers, this may defer the problem to the next tax year, or produce a permanent tax saving – don’t forget, gift aid payments can be carried back a year in many cases.
  • Take a close look at the taxable benefits you receive. For instance if your employer pays the fuel costs to cover private use of a company car consider reimbursing the private fuel cost.

 Increase your tax allowable deductions:

  • Increase charitable donations.
  • Increase pension payments.
  • If you are self-employed consider investment in plant or equipment and take advantage of the £250,000 Annual Investment Allowance.

It’s worth giving the matter serious thought as you will potentially save 60% of any cost in reduced Income Tax payments. The above suggestions are not the only strategies you could employ. If you would like to organise a meeting to discuss your planning options in more detail please call.