Planning ahead for high marginal rates of tax

If you find that your tax bill is increasing year on year you may be wondering what you can do to remove yourself from these high marginal rates.

Income tax pinch points

There are a number of pinch points in the tax system. For the 2019-2020 year these are:

  • £45K – Higher rate threshold
  • £50K – £60K – Loss of child benefit (1% per £100)
  • £100K – Loss of personal allowance (all gone by £123,700)
  • £100K – 30 hours free childcare
  • £110K – Threshold for reviewing annual pension allowance
  • £150K – Top rate/annual pension allowance restricted

Action you can take

You could find that making pension contributions or charitable donations will have a positive affect.

If you are in a position to control your income (for example the timing of paying bonuses or because you run your own company) you may be able to manage the situation more effectively with the use of loans.

It is a feature of the current tax rules and rates that an individual may find they are better off from a tax perspective by having one tax year at £50,000 and one at £70,000 rather than two years at £60,000.

You may also find that where you can work as a team within your own family, you can achieve some remarkable outcomes in some cases.

Example

A grandparent (aged 85) makes a gift during their lifetime to their granddaughter (aged 40) instead of leaving her money in his will. The granddaughter in this example has a marginal income tax rate of 60% (as this income is between £100,000 and £125,000) and he uses the gift to make a pension contribution. 

The table below demonstrates the significant difference when factoring in not only the income tax relief available to the granddaughter but also the effect of inheritance tax saved and the tax-free growth in the pension scheme.

The key is to plan ahead. For further advice please get in touch with a member of our tax team.