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.

Original post by Latest Taxation News and many thanks to them and their entry and picture of their BMX Bike