If you are earning over £100,000 – this may shock you!
For high earning taxpayers who have a net income that exceeds £100,000, for each £2 earned over this amount, £1 is taken off of your personal allowance until the allowance reaches £0.
- If your gross income falls below £100,000 you can reclaim your full personal allowance of £12,500.
This means that those earning between £100,000 and £125,000 are paying 60% tax on their salary above £100,000!
Above £125,000 there is no personal allowance left and therefore the amount of tax paid reduces back down to 40%.
Due to this, many taxpayers might consider different opportunities available to avoid being part of the personal allowance trap. This can include gifts to charity, increasing pension contributions, participating in investment schemes or dividend planning.
One method is to arrange with your employer for them to reduce your PAYE salary and increase your pension contribution. Contributing to a pension reduces your income for tax purposes. This option is known as salary sacrifice or salary exchange.
Giving gifts to charity
Another method to reduce your tax bill would be to make a gift to charity in the current tax year and then select to carry back the contribution in the following year. This request must be made before or at the same time as the self-assessment return is completed for the following year.
Salary sacrifice schemes offered by employers can also reduce your tax and National Insurance bill if you join a Childcare Vouchers scheme before the end of the tax year or make use of the cycle-to- work scheme.