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|High Earners - How to Avoid the Loss of the Personal Allowance - and Save Tax at 60%!|
Tax Insider outlines tax saving strategies for higher earners, by Tony Granger.
The personal allowance is a valuable benefit as it reduces your taxable income. However, if you earn in excess of £100,000, then the personal allowance reduces as follows:
There is plenty of motivation to reduce your net adjusted income to below £100,000 to retain your personal allowance, and reduce your tax burden.
The current personal allowances for 2012-13 are:
Basic personal allowance £8,105
Tax rates for 2012-13 are as follows:
Strategy 1 – if Married or in a Civil Partnership
If you have a lower-taxed or lower-earning spouse then consider transferring income-producing assets to them. You could save your personal allowance and use their allowance more effectively.
The transfer must be outright and unconditional, and there is no CGT if living together or IHT if UK domiciled. If you are a 40% taxpayer and you transfer the income-producing asset to a non-taxpaying spouse you save 40% (e.g. on interest income) or 22.5% (on dividend income).
Strategy 2 – if you have Investments
Redistribute investment capital so that you can reinvest in tax-free investments, or reinvest in tax-efficient investments that produce no income – such as unit trusts and open-ended investment companies for growth, or investment bonds. Either try to produce less taxable income or invest for growth.
Strategy 3 – Reduce your Taxable Income through Pension Contributions
Making a pension contribution (you can make gross contributions of up to £50,000 per annum unless you use carry forward of unused allowances from the past three years, where the total contribution in the current year could be up to £200,000) can save your personal allowance and give you tax back.
The following example shows how this works:
Assume taxable earnings of £120,000 p.a. Male age under 65.
Lump sum contribution of£21,000 gross, net £16,800
Total savings in tax: £3,242 + £4,200 = £7,442 for a net pension contribution of £16,800.
This strategy has saved your personal allowance and reduced your tax payable.
Strategy 4 – Make Charitable Donations
Similar to pension contributions above, making charitable donations (Gift Aid payments) is currently unlimited (although there are steps being considered by the Government to cap this). Charitable donations reduce ‘adjusted net income’, therefore allowing you to save your personal allowance if reducing adjusted net income to below £100,000. Tax relief is claimed by the charity – the payment is treated as being paid ‘net’. A higher rate taxpayer may claim additional relief against Income Tax or Capital Gains Tax (the Income Tax claim is for the difference between the higher rate and basic rate (40-20=20%) on the total value of the donation. If you donate £100, the total gift to the charity is £125 as a gross donation. You get tax relief back of 20% x £125 = £25.
Two additional tax tips are that
About The Author
The above article is taken from 'Tax Insider,' TaxationWeb's own publication specifically for taxpayers and their advisors. 'Tax Insider' is a monthly magazine containing numerous tax tips, articles, questions and answers from leading tax experts, aimed at helping taxpayers to save tax and reduce their liabilities.
Article Added Sunday, 27 May 2012 | 2223 Hits
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