Practice Blog

The 2010/11 tax year has seen the fruition of some of the previously announced measures to increase taxes on "higher earners". The removal of personal allowances from PAYE codes for the current year means many are now feeling the effects.

Whilst more complex options may be appropriate for very high earners or those who control their own businesses, this blog post highlights a couple of basic steps taxpayers should consider to mitigate additional liabilities.

In a later blog we will focus on what alternative tax efficient investments might be available to those for whom a pension is no longer tax efficient.

Is your personal allowance under threat?

Do you have adjusted net income in excess of £100,000?

Your adjusted net income is your total taxable income for the year reduced by specific allowable deductions (for example trading losses), gross gift aid donations and gross pension contributions.

If the answer is "yes" then your personal allowance of £6,475 is withdrawn at the rate of £1 for every £2 you earn in excess of £100,000, creating an effective tax rate of 60%

If you are caught by the rules you should seek advice and consider the following options:

Making a charitable donation
"Shifting" income to your spouse where possible
Making a pension contribution (as long as you are not caught by the rules below for those who have/ have had relevant income in excess of £130,000)

Are you unable to get higher rate tax relief on additional pension contributions?

Do you have relevant income in excess of £130,000 for the current tax year or either of the two preceding tax years?

Calculating relevant income is a complex 6 stage process as follows:

Step 1 - Total taxable income for year
Step 2 - Add Gross pension contributions made under a net-pay arrangement
Step 3 - Less Qualifying losses
Step 4 - Less Gross pension contributions made up to a value of £20,000
Step 5 - Add Salary sacrifice arrangement to provide pension benefits if made after 9th December 2009
Step 6 - Less Gross gift aid donations made
Total = Relevant Income

If the answer to this question is "yes" then you are potentially limited in the amount of pension contributions paid by you or on your behalf which will attract higher rate tax relief.

If you have established a pattern of regular pension contributions (under a monthly or quarterly payment pattern) prior to 22nd April 2009, then these are protected.

However higher rate tax relief on any additional irregular contributions made after that date will be restricted to the extent that the total contributions made by you or on your behalf in the tax year exceeds the special annual allowance of £20,000.

If you are caught by the rules you should seek advice and consider the following options:

Making a charitable donation
"Shifting" income to your spouse where possible
Considering an alternative tax efficient investment (to be the subject of a future blog)

Are you being taxed at 50% on your income?

Do you have taxable income in excess of £150,000?

Your taxable income is your net income after any allowable deductions and your personal allowance (which at this income level, will be nothing but a fond memory).

If the answer is yes then your income in excess of £150,000 will be subject to a marginal tax rate of 42.5% on dividends and 50% on all other income.

If you are caught by the rules you should seek advice and examine the following options:

Making a charitable donation
"Shifting" income to your spouse where possible
Considering an alternative tax efficient investment (to be the subject of a future blog)