Understanding the Loss of Personal Allowance for Income Over £100,000

As your income grows, so too do the complexities of your tax obligations. One significant milestone for UK taxpayers is the £100,000 income threshold. Earning above this amount results in the gradual loss of your tax-free personal allowance (£12,570 for the 2024/25 tax year), effectively increasing your marginal tax rate. Here, we break down what this means and how you can plan effectively to minimise its impact.

The Mechanics of Personal Allowance Reduction

For every £2 of income over £100,000, your personal allowance is reduced by £1. This means that once your adjusted income reaches £125,140, you no longer have any personal allowance. The consequence? A marginal tax rate of 60% on income between £100,000 and £125,140 due to the combination of lost personal allowance and the 40% higher-rate tax.

For example:

• If your income is £105,000, you will lose £2,500 of your personal allowance (£5,000 over the threshold divided by 2).
• Instead of having £12,570 tax-free, you now only have £10,070 tax-free.

This can lead to a surprisingly high effective tax rate in this income band if no planning is undertaken.

Strategies to Mitigate the Loss

Effective planning can help you reduce your adjusted income, preserving your personal allowance and reducing your tax bill. Here are some options:

1. Make Pension Contributions
   Contributions to a registered pension scheme reduce your adjusted income. For example, contributing £10,000 to your pension could bring your income back below £100,000, restoring your full personal allowance. Additionally, you benefit from tax relief on the contributions.
2. Charitable Donations
   Donations made through Gift Aid are another way to reduce your adjusted income. Higher-rate taxpayers can claim additional relief, and your donations effectively extend your basic-rate tax band.
3. Salary Sacrifice
   Arranging with your employer to exchange some of your salary for non-cash benefits, such as extra pension contributions, can lower your taxable income and help preserve your personal allowance.
4. Timing of Income
   Deferring income or bonuses to a later tax year, if possible, can help keep your income below the £100,000 threshold in the current year.
5. Consider Tax-Efficient Investments
   Investing in vehicles such as ISAs or Venture Capital Trusts (VCTs) can provide tax benefits without increasing your adjusted income.

Why Professional Advice is Essential

The interplay between personal allowances, tax bands, and tax reliefs can be intricate. For individuals earning over £100,000, the marginal tax rate makes it essential to explore all available options to manage your tax efficiently. A tailored approach, considering your specific circumstances and goals, will yield the best outcomes.

How We Can Help

At Munro Bowman, an experienced accountancy business, we specialise in helping clients like you navigate these challenges. Whether it’s pension planning, charitable giving, or structuring your income efficiently, we’re here to ensure you keep more of what you earn.

Take Action Today

If your income is approaching or exceeding £100,000, now is the time to act. Contact us today for a personalised consultation to explore the strategies that are right for you. Let’s work together to maximise your tax efficiency and secure your financial future.