Tax trap 1 – Withdrawal of personal allowance

What is the maximum rate of income tax in the UK? – 45%? – wrong!

If your ‘adjusted net income’ is within a certain band, you are paying an effective rate of 60% on any income earned within that band. ‘Adjusted net income’ is defined as taxable income less certain reliefs such as pension contributions and gift-aided donations.

The band is between £100,000 and £125,000. (The upper rate is actually £100,000 plus twice the personal allowance. The current personal allowance is £12,500).

This measure was introduced by Alistair Darling back in 2010. I understand what he was trying to do, but the unintended consequence is that we now have the bizarre position where a UK taxpayer’s rate of tax goes from 20% to 40% to 60% to 40% and then finally to 45%.

What can you do about it:

1. If your income fluctuates, try to even it out. Rather than have income of £80,000 in year 1 and £120,000 in year 2, it would be much more preferable to have income of £100,000 in both years.

2. Reduce your income. Is it worth working for 40p in the pound? (It’s actually 38p if you include NIC).

3. Gift aid – Making payments to UK charities decreases your adjusted net income. If your adjusted net income is between £100,000 and £125,000, for every £80 which you pay to charity, the charity will receive an extra £20 and you will receive a tax rebate of £40. Not bad.

I got so annoyed with the measure that I wrote to the then Chancellor, Phillip Hammond. You can click to download my 2 letters at the end of this article. Surprisingly it didn’t do any good.

Neil Robinson

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