When ‘adjusted net income’ exceeds £100,000, the Personal Allowance of currently £11,850 for tax year 18/19 is reduced by £1 for every £2 over this limit meaning that earned income between £100,000 and £123,700 is effectively taxed at a whopping 60%!
Clients under age 75 can consider making a pension contribution which will have the effect of reducing their adjusted net income. So, for example, someone earning £123,700 may make a pension contribution of £23,700 which with 60% tax relief will cost them £9,480 because of 40% relief on the contribution and the re-claim of Personal Allowance.
Here’s the proof:-
|
Income & Pension Contribution |
||
|
Taxable Income |
£123,700 | £123,700 |
|
Pension Contribution (£18,960 with basic rate relief of 20%, i.e. £4,740) |
Nil |
£23,700 |
| Personal Allowance | Nil |
£11,850 |
|
Tax Calculation |
||
|
£11,850 |
n/a |
Nil |
|
Basic Rate Band |
||
|
£34,500 |
£6,900 |
|
|
£58,200 (£34,500 + £23,700) |
£11,640 |
|
|
Higher Rate Band |
||
|
£89,200 (£123,700 – £34,500) |
£35,680 |
|
|
£53,650 (£123,700 – £70,050) |
£21,460 |
|
|
Total Income Tax Liability |
||
|
£42,580 |
£33,100 |
|
|
Difference |
||
|
£9,480 saving |
||
Add back the basic rate tax relief at source of £4,740 and this makes £14,220 tax relief in total on a pension contribution of £23,700!
Anyone earning over £100,000 with some surplus cash should seriously consider making a pension contribution but not before taking financial advice!