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Most UK taxpayers are entitled to a part of their income tax—free, i.e. a personal allowance. The personal allowance for 2019/20 is £12,500.
By contrast, individuals with annual income exceeding £100,000 lose £1 of their personal allowance for every £2 of income above £100,000. The higher rate threshold at which tax is charged at 40% also falls in step with the personal allowance, meaning that not only are you taxed at 40% on the additional £1, you also pay an extra 20% per £1 lost, resulting in the marginal rate of 60%.
This continues up to £125,000 (£100,000 plus £12,500 x 2), at which point your entire personal allowance has been lost and the marginal Income Tax rate drops back to 40%.
To provide an example, take Mike, an individual with total income of £120,000 in 2019/20. He loses £10,000 of his personal allowance, leaving only £2,500. This £10,000 of extra taxable income (at 40%) gives £4,000 more Income Tax on top of the £8,000 due on the £20,000 income over and above the £100,000 threshold. Therefore, £12,000 Income Tax as a result of the extra £20,000 income is an effective rate of 60%.
Those at particular risk are normally earners in receipt of variable employment bonuses which are paid toward the end of the tax year and may push their total annual income above £100,000 or traders with fluctuating profits. Clearly, the 60% rate is a punitive result, but there are some tax-efficient strategies available to alleviate it.
The first is to make personal pension contributions (including contributions to SIPPs but excluding those paid under salary sacrifice or employer contributions). Pension contributions are treated as being paid net of basic rate tax and increase the basic rate band by 20% of the grossed-up amount. This can serve to counteract the fall in the higher rate threshold triggered by the loss of the personal allowance.
The second solution is to make charitable donations under Gift Aid. These are treated in a comparable way to pension contributions whereby the basic rate band is extended by 20% of the grossed up contributions.
However, both of these require cash, so you need to be fully aware of the consequences.
We see the Tax Return as a window into our client’s life and the best way for us to get to know each other very well. We aim to see that the right amount is paid at the right time on the basis of full, accurate and timely disclosure.
We assume a role somewhere between trusted adviser and knowledgeable friend – a role vital in ensuring clients are able to keep and enjoy more of what they earn and bequeath it to the next generation.
UK tax is constantly changing and you will have events that require tax planning (e.g. a possible investment into a business or sale of an asset) while also having ideas of how you would like to use your wealth to benefit you and your family (e.g. via gifts or the creation of trusts).
We aim to ensure that you make the most of the tax legislation, while being cautious and reasonable in our approach to tax planning.
If not, then don’t worry, we’ve got it here for you. This useful guide has all the year’s tax rates for 2019 and 2020 in one place, making it easy for you to refer to throughout the year. Included in the guide is everything from the main Income Tax and Corporation Tax rates, through to deadlines and allowances. Download the tax rates guide now and see what they mean for you this year.
2019 and 2020 UK tax rates and allowances
Foreign domiciled UK residents have access to some very beneficial tax rules but those benefits come with complexity, which is ever increasing. We help those who are yet to come to the UK, are already here or those who have left to ensure that they make the most of the available rules.
For anyone outside the UK who owns UK real estate (including non-UK companies), we help them with their ongoing tax compliance and any related tax planning.
If you’re a US citizen living in the UK or you’re planning to move here, there will be a number of important life stages that you will need to plan for. Our dual-qualified US and UK tax experts have an intricate understanding of both systems. Tell us your story and together we’ll assess your liabilities and tackle any issues before they become an issue.
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