If you earn over £100K in any tax year, the personal allowance diminishes by £1 for every £2 of adjusted net income over £100,000, regardless of age. This reduction in personal tax allowances takes place when any taxable receipt pushes your income over £100,000. This ultimately decreases your personal Income Tax allowance to zero if adjusted net income reaches £125,140 or above.
Adjusted net income includes taxable income before personal allowances, deducting tax reliefs like; trading losses, charitable donations, and pension contributions.
In the current tax year, if you anticipate your adjusted net income to fall between £100K and £125,140, you’ll encounter an effective marginal tax rate of 60% as your tax-free personal allowance of £12,570 diminishes.
For those within this bracket, explore planning options to sidestep the personal allowance reduction by lowering your income below £100,000. Strategies include charitable gifts, increased pension contributions, and involvement in specific investment schemes.
Options to mimimise tax for higher or additional rate taxpayers are available. This usually is a charitable contribution in the current take year with the option to carry back the donation to the previous year. Requests for carryback must be submitted before or simultaneously with completing the 2022-23 self-assessment return, i.e., by January 31, 2024.
