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Forget 50% – are you paying 60% tax without knowing it?

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Wednesday March 21, 2012 at 9:31am

The news today is all about the budget. As promised in previous statements the BBC is reporting that the Chancellor will increase the personal allowance to £9,205, which might sound like good news but, read on.

The personal allowance trap is the little-known area of income tax quicksand, which progressively drags you under once your income exceeds £100,000. It creates a situation where individuals pay 60% income tax on some of their income.

How can this happen? It’s all down to the withdrawal of the personal tax allowance by £1 for every £2 that your income exceeds the magic figure of £100,000. And with the large increase in the personal allowance (the plan is to get that up to £10,000 eventually) it is a tax trap that will affect more and more people each year.

The bizarre taxation anomaly this produces is clear when you compare the current impact (tax year 2011/12) for tax payers:

Taxable Income                      Marginal Rate         
£100,000 to £114,950 60%
£114,951 to £149,999 40%
£150,000+ 50%

It gets worse…

If you thought the personal allowance trap was bad enough, planned changes to the basic personal allowance will make the situation even worse. The Government plans to increase the basic personal allowance to £10,000, which means even more people will be caught in the personal allowance trap. Even before then the net will widen – consider the figures for 2012/13 based on the planned increase of personal allowances to £9,205:

Taxable Income                       Marginal Rate       
£100,000 to £116,210 60%
£116,211 to £149,999  40%
£150,000+ 50%

If you then add on your national insurance contributions of 2% if employed or self-employed, the total marginal rate reaches an eye-watering 62%.

The Chancellor may announce a change to the 50% rate of tax today, which could change things at the upper end, but the personal allowance trap will remain.

That’s why we’re here

Professional accountancy services aren’t simply about keeping your books. We’re here to save you money wherever possible. There are several techniques which can be used to avoid this silent tax-grab. If your income falls within the 60% band – or looks likely to do so in the near future – you should contact us for a discussion about the appropriate strategy to deal with this.

There’s no need to get sucked into the personal allowance trap. You shouldn’t be paying a higher rate of tax than someone earning more than you. Although we can’t change the rules, we can steer you onto routes that bypass the income tax quicksand. Call us now and protect your money.

Andy Parker

Chartered Accountant and Chartered Financial Planner

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Parker Chartered Accountants and Financial Advisors is the trading name for Parker Business Development Ltd (Registered No. 4116664), Parker Tax and Trust Ltd (Registered No. 06950353) and Parker Financial Planning LLP (Registered No. OC347027). Parker Financial Planning LLP is authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales – registered office contact details here