Tag Archive: Personal Allowance

  1. Budget Update: I giveth and I taketh away….

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    The tax system is unnecessarily complex, caused by multiple amendments over the years and these complexities make it difficult to initially understand the real impact of any changes, until you drill into the detail.

    This week Mr. Hammond announced his budget and what caught the headlines was that he brought forward their manifesto promised to increase the personal allowance and higher rate band for income tax, but there was a little more to it, than the headlines.

    The personal allowance will increase to £12,500 and the higher rate threshold to £50,000, a year earlier than expected (from 2019/20).  This is good news and saves you, if you earn £50,000 or more £860 per person in income tax.

    What was not highlighted in his speech, were the changes to national insurance contributions, which partly counter the income tax savings.  Currently employees pay Class 1 National Insurance contributions at 12% on earnings from the Primary Earnings Threshold (£8,424 pa) up to the Upper Earnings Limit of £46,350, over this level you only pay 2%.

    The budget increased the Upper Earnings Threshold to £50,000 which means you pay an additional 10% national insurance on income from £46,350 to £50,000.  Therefore, if you earn £50,000 or more you will pay an extra £340 in national insurance – making the income tax saving of £860 only worth £520, a little less attractive!

    Therefore, legal tax planning is essential and for basic rate income tax earners the utilisation of the transferable Marriage Allowance is a key step.

    For all couples, as a bare minimum, both should use their personal allowances, starting/basic rate tax bands and the dividend and personal savings allowances to the full. This is particularly beneficial where income can be legitimately shifted from a higher or additional rate taxpaying spouse to a non, starting or basic rate taxpaying spouse.

    For those with cash and investments this will usually be facilitated by an unconditional transfer of income-producing assets from the higher tax paying spouse to the other.

    Upon initial introduction in 2013 the take up of the transferable marriage allowance was very low however, it has significantly increased since then and couples should ensure that they do not lose out on the ability to transfer the allowance where eligible to do so.

    Any such transfers would usually be capital gains tax and inheritance tax neutral as transfers between spouses living together are treated as transfers on a no gain/no loss basis for capital gains tax purposes and transfers between UK domiciled spouses (living together or not) are exempt from inheritance tax without limit.

    Warren Shute CFP is a Chartered Wealth Manager and author of the Amazon bestselling personal finance book The Money Plan.

  2. Personal Allowance – Do I lose it if I earn over £100k?

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    The Personal Allowance is the amount of income an individual can earn before they start to pay Income Tax but it will be reduced and potentially lost altogether for those whose total income exceeds £100,000. The Personal Allowance (under age 65) is currently £11,000 but you will lose £1 of Personal Allowance for every £2 of Income over £100,000. Anyone with income over the £122,000 (£11,000 x 2) will lose their entire allowance.

    As a consequence the Marginal Rate of Tax for someone with income between £100,000 and £122,000 will be 60% (Tax at 40% on income over £100,000 up to £122,000 PLUS Tax at 40% on the loss of Personal Allowance up to £11,000). You can recover the Personal Allowance by reducing your income below the £100,000 limit. Apart from asking your employer to pay you less (not a sensible or popular decision, it may save Tax at 60% but you still lose out on the remaining 40%) the only viable option to consider is a Pension Contribution. Your Total Income is expected to be £112,000 i.e. you have £12,000 of income over the £100,000 and in effect you are losing £6,000 of your Personal Allowance.

    If however you invested a gross amount of £12,000 into a pension it would reduce your income to £100,000, thus restoring your Personal Allowance. The pension investment will qualify for Basic Rate Relief at source and so to invest a gross amount of £12,000 a pension would only cost you £9,600. You would then be eligible for a further 20% Tax Relief (representing the Higher Rate Tax Relief). This is claimed via your Self-Assessment Tax Return and you would end up with a Tax Rebate of £2,400. Overall it has cost you £7,200 to invest £12,000 into the pension. But in addition you will regain the lost £6,000 of Personal Allowance which gives you a further Tax Saving of £2,400 (£6,000 x 40%). It could therefore be argued that the cost of the £12,000 gross pension contribution is £4,800 (£7,200 – £2,400). 

    Please contact us if you would like further information regarding the above.