How to avoid higher and marginal rate tax:
There are situations where an individual’s gross income (before personal allowances) exceeds a certain level and the effective rate of tax could rise to 60% or more. These are:
- Over £50,000; you are liable to higher rate tax at 40%
- Over £50,001 and up to £60,000; a reduction of child benefits where applicable and you are taxed up to around 58% (if you have two eligible children).
- Over £100,000; your personal allowance goes down by £1 for every £2 that your net income is above £100,000, leading up to 60% tax rate, plus a requirement to file a personal tax return.
- £150,000; you are liable to upper rate tax at 45%.
Tax Planning
To avoid higher and marginal rate tax:
- Split income producing assets with your spouse or partner.
- Make pension contributions and Gift Aid donations. By doing both you are reducing your taxable income.
- Depending on the company year end, it might be worth as a director obtaining a short term loan from the company so you can make an additional pension contributions in one tax year to reduce your income.
- Look out for a cap on unlimited income tax loss reliefs. This could affect an entrepreneur’s ability to deduct losses from self employment against earned or investment income.