Income Tax – avoiding higher rates of tax

You will undoubtedly be aware that the three income tax rates are 20%, 40%, and 45%. What you may not know is that your personal tax circumstances can boost these rates. For example, suppose your taxable income exceeds £100,000. In that case, you could lose your personal tax allowance, and for 2020-21, this will increase the marginal rate of tax applied to earnings between £100,000 and £125,000 to 60%.

The following notes highlight some of the tax savings ideas that you may be able to consider:

 

  • To lower the impact of higher rate tax (or marginal rates), consider sharing ownership of income-producing assets with your spouse, especially if your spouse pays no income tax or tax at lower rates.
  • Similarly, consider sharing ownership of income-producing assets with your adult children (over 18 years. Your children, whatever age, can earn up to £12,500 this tax year without paying income tax). Transfers of certain assets may create a CGT liability, so planning is critical.
  • If you have a pension scheme take advice from your pension advisor on the level of contribution you should make this year. The maximum you can pay is £40,000, reduced to £4,000 for those on higher incomes. If applicable, you can use any unused relief in the previous three years.
  • If you cash in part of your pension pot, the amount you withdraw may be added to your total earnings. Be sure to consider this, as there may be additional tax to pay above any tax deducted by your pension pot manager.
  • There are no limits to the amount of gift aid donations you can make. These contributions extend your basic rate tax band. They are an effective strategy for avoiding the higher and marginal rates of income tax. Charitable donations are also one of the few remaining reliefs that you can carry back, in certain circumstances, to the previous tax year.
  • You can transfer up to £1,250 of your personal allowance to your spouse if you don’t earn enough to fully utilize this allowance against your earnings. You can only do this if your spouse pays tax at no more than the basic rate (20%).
  • If you are provided with a company car, and your employer pays for your private fuel, you should consider repaying this private fuel cost to your employer if the repayment cost is less than the tax you would have to pay on the car fuel benefit charge. To do this effectively, you will need to calculate your annual private mileage.
  • A further consideration for company car drivers is to discuss changing your vehicle for a lower CO2 emissions model. The car benefits charge increases in direct proportion to these CO2 ratings.
  • Don’t forget to use your ISA allowance. In this way, you can invest up to £20,000 in the current tax year, and any interest earned will be tax-free.
  • There are several specialist investments you can make that are qualifying deductions for income tax purposes. They include the Enterprise Investment Scheme, investments in certain Social Enterprises, Seed Enterprise Investment Schemes, and Venture Capital Trusts. Income tax relief varies between 30% and 50% of the qualifying investments. However, you will need to consider the commercial risks as well as the tax advantages.
  • Don’t forget that the State Pension is treated as taxable income for tax purposes. You are paid without deduction of tax. If your total income (including your State Pension) exceeds £12,500, this may produce unwelcome bills from the tax office at the end of the tax year.

If you have spotted an item on the above list that strikes a chord, call now to discuss your options. This will need to be a telephone call initially, followed by possible online conversations due to lockdown considerations.

Please do not act on any of the matters shown here without first contacting us for advice. 

Call today on 01473 744700, send an email to contactus@accountinggem.co.uk, or visit our website www.aag-accountants.co.ukWe’re here to help you every step of the way.