Manage your pay within tax bands and avoid paying tax at 60%

Manage your pay within tax bands and avoid paying tax at 60%

Most individuals receive an amount which is tax free called their Personal Allowance (current tax year 2017/18 is £11.5k). This allowance is gradually reduced for people with income over £100k until it is fully withdrawn on income in excess of £123k (you lose £1 of personal allowance for every £2 that income is above £100k).

Therefore tax paid on that income between £100k and £123k is effectively at 60%.

Example

Joe Bloggs earns £100k from employment in 2017/18 so pays PAYE of £28.7k. He gets a full personal allowance to be used against his salary.

If he gets an extra bonus of £10k then he is over the threshold of £100k so starts to lose his Personal Allowance. He will therefore lose £5k of Personal Allowance which will result in £15k being taxed at 40% (£10k re bonus and £5k re income that previously was at 0%). This will result in £6k PAYE tax being paid on the £10k bonus which is a rate of 60%!

What can you do?

If you’re an owner/manager of a business you could consider:

• Take slightly less income to remain below the threshold (for example rather than take income on 31 March 18 that took you over the threshold you could defer that income to 6 April 2018 so that it formed part of your income for the following tax year)
• Treat the £10k as a loan and repay it in the new Tax year (a Director can borrow up to £10k from a Limited company without it being a benefit in kind as long as repaid within 9 months of the year end)

If you’re a Director/employee of the business not looking to reduce your remuneration you could consider taking the income in excess of £100k as a salary sacrifice (such as child care vouchers or pension contributions).

Make sure you speak to an accountant about remuneration planning on a regular basis. If you know what income you are likely to earn for the Tax year then they can potentially advise the best way to structure that both in terms of timing and how it is taken (e.g. salary/dividend mix).