When your income exceeds £100,000 for income tax purposes your entitlement to a personal allowance (£11,850 for 2018-19) is reduced by £1 for every £2 that your income exceeds this threshold.
Which means, when your income reaches £123,700, you no longer qualify for a personal allowance.
The effect on the income tax rate you pay in this band – £100,000 to £123,700 – is alarming. As well as paying tax at the higher rate of 40%, income up to the value of your lost personal allowance £11,850 that was previously exempt from tax is now due to be taxed at 20%. Accordingly, your combined income tax rate is 60%.
This process may catch some individuals unaware. For example, say you take a drawdown from your pension pot for £50,000 and your other income is say £80,000 – below the £100,000 cut-off point. Your pension provider has likely deducted tax at 40% from the payment made to you and you may believe that what’s left is yours to spend or invest. Not so. When your total income position is calculated at the end of the tax year this will have breached the £100,000 limit and the effect of the loss of personal allowance will create an additional tax bill.
Readers who are concerned that they may be on route for an income of more than £100,000 for this current tax year, may we respectfully suggest that they call to discuss their options. There are still planning opportunities that can be utilised but decisions on what needs to be done, and action to be taken, needs to happen before 5 April 2019.
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