Many clients these days are caught by tipping over a tax allowance, says Mike Trawford of NW Brown.
How to reinstate your allowances
Prime examples of this are those who are subject to the Child Benefit Tax Charge (CBTC) or have income in excess of £100,000 per tax year.
The Personal Allowance is reduced by £1 for every £2 of total income over £100,000. Once income exceeds £125,000 then the entire standard Personal Allowance of £12,500 would be lost. A pension contribution could be made to reduce assessable income by the level of the gross contribution.
If income was £110,000 and a gross pension contribution of £10,000 was made, the assessable income would be reduced by the £10,000 pension contribution, re-instating £5,000 of Personal Allowance. The pension contribution would be made net of basic rate tax relief and so a payment of £8,000 would be required. This means that a net pension contribution of £8,000 would provide a gross pension credit of £10,000 and generate tax savings of £6,000.
Where someone in the household earns more than £50,000, child benefit starts to be withdrawn at the rate of 1% for every £100 of excess, so that it is entirely lost once their earnings reach £60,000. So, for someone earning £51,000 they would lose 10% of their child benefit. As per the example above, a pension contribution could be made to reduce the level of assessable income thereby saving on the CBTC and generating additional higher rate tax relief.
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