Are you about to fall over a cliff edge?

A what, I hear you ask. In the tax world there are income brackets where £1 into the next bracket can cost you dearly.

These happen not only where a rate change is activated, so when you go from being a basic rate taxpayer to a higher rate taxpayer (£50,000 for 2019/2020), but also at £100,000 when you start to lose your personal allowance. And in addition to the rate changes other tax consequences can also kick in depending on the type of income you have.

For example if your total income is £49,999 and £1,000 of that is bank interest on savings you won’t pay any tax on the interest. If your income is £50,001 and £1,000 is bank interest you’ll pay £100 tax because only the first £500 of your interest is at the 0% savings rate.

If your household claims child benefit and you’re the higher earner with income over £50,000 you’ll start to see a clawback of the child benefit, and at £60,000 you have to repay it all.

If your income is over £100,000 then you start to lose personal allowance on a £1 for £2 basis, and between £100,000 and £125,000 (2019/2020) you’ll pay an effective 60% rate of tax.

As you’ve probably guessed this can be quite a shock for people who suddenly tip over the cliff edge. But there are things you can do to mitigate the effects.

Firstly if your income, and by this I mean everything that’s taxable not just your salary, so salary, savings, benefits in kind, rental income are going to exceed one of the cliff edge limits and you realise that today, we have until 5 April to see if you can made a pension contribution to bring your adjusted income back below the magic number, be it £50,000 or £100,000 or indeed £150,000 where you don’t get any 0% savings rate at all.

The other thing you can do is to make a charitable donation and with gift aid donations you are allowed to carry back the value of donations made in say 2019/2020 to 2018/19 and claim relief there instead. So if your income was £50,100, made up of salary and £1,000 bank interest you will have a tax bill of £100 on your bank interest and a claw back of £10 child benefit.  A charitable donation of £80 made under gift aid would reduce the tax to £0. A net saving to you of £30 and £100 to the charity because they can claim back some tax too.

Need help in planning ahead – call us to discuss.

This information is correct at September 2019 and legislation is always subject to change. KM Business Solutions Ltd accept no responsibility for any use of this information. 

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