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Personal Allowance – Do I Lose It If I Earn Over £100k?Written on January 24, 2018 by Kirk Rice LLP

Personal Allowance – Do I Lose It If I Earn Over £100k?
Financial Services Questions

The Question:

I was made redundant last year and was fortunate to get a new job quickly. I did get a good redundancy package part of which was tax free but the additional amount combined with my other income means my total income is going to be c£112,000. As I understand it because my income is over £100,000 I lose most of my personal allowance. Is there anything I can do about this?

Kirk Rice LLP answers:

The personal allowance is the amount of income an individual can earn before they start to pay income tax but it will be reduced and potentially lost altogether for those whose total income exceeds £100,000. The personal allowance (under age 65) is currently £12,500 (2019/2020) but you will lose £1 of personal allowance for every £2 of Income over £100,000. Anyone with income over the £123,000 will lose their entire allowance.

As a consequence the marginal rate of tax for someone with income between £100,000 and £125,000 will be 60% (tax at 40% on income over £100,000 up to £125,000 PLUS tax at 40% on the loss of personal allowance up to £12,500). You can recover the personal allowance by reducing your income below the £100,000 limit. Apart from asking your employer to pay you less (not a sensible or popular decision, it may save tax at 60% but you still lose out on the remaining 40%) the only viable option to consider is a pension contribution. Your total Income is expected to be £112,000 i.e. you have £12,000 of income over the £100,000 and in effect you are losing £6,000 of your personal allowance.

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If however you invested a gross amount of £12,000 into a pension it would reduce your income to £100,000, thus restoring your personal allowance. The pension investment will qualify for basic rate relief at source and so to invest a gross amount of £12,000 a pension would only cost you £9,600. You would then be eligible for a further 20% tax relief (representing the higher rate tax relief). This is claimed via your self-assessment tax return and you would end up with a tax rebate of £2,400. Overall it has cost you £7,200 to invest £12,000 into the pension. But in addition you will regain the lost £6,000 of personal allowance which gives you a further tax saving of £2,400 (£6,000 x 40%). It could therefore be argued that the cost of the £12,000 gross pension contribution is £4,800 (£7,200 – £2,400). As always get advice and be aware that if it is of interest you need to do it before the end of the tax year (5 April 2020).

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This post was last updated on 4th June 2019

Any reader interested in discussing this topic further can telephone Viru Patel on 01344 875 000 in our Ascot office or Hadley Baldock on 0208 789 8588 in our Putney office or email info@kirkrice.co.uk

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Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.