According to the published tax tables, the highest rate of income tax is 45%, payable on all earnings over £150,000.
However, this masks a rather unpleasant shock which comes if your income is just over the £100,000 mark—that of an effective tax rate of 60%. Ouch!!
This comes about because once your income exceeds £100,000 annually, you start to lose your personal tax-free allowance – for every £2 you earn, you suffer a reduction of £1 on your personal allowance. As the standard personal allowance for the current tax year is £9,440, then once your income exceeds £118,880 you will have lost your personal allowance entirely. And the total tax payable on this marginal amount of £18,880 is (£18,888 x 40%) + (£9440 x 40%) = £11,328, or 60% of £18,880.
If your income is likely to go marginally above £100,000 for the 13-14 tax year, you may wish to review your options, which are likely to include:
Reduce your income
- You might be able to defer taking any bonuses or dividends until after 5th April 2014. Depending on your situation, this might just defer the issue until the following tax year or it might result in a permanent tax saving
- Review any taxable benefits that you receive
- Review whether there is scope to transfer any of your income (such as investment income) to a partner or spouse who earns at a lower tax bracket
Increase your tax –allowable deductions
- Make a personal pension contribution before the tax year-end
- Increase charitable donations. Remember that gift aided donations can be carried back a year
- If you are self-employed, look carefully at the timings of any capital purchases to see whether you might be able to take advantage of more Annual Investment Allowance.