In an attempt to increase tax revenues without affecting middle income earners, the treasury introduced legislation back in 2010 that removes the personal allowance of those earning over £100,000. This legislation is still with us, and is affecting more people each year due to the increase in the personal allowance.  The personal allowance (PA) represents the amount of income that an individual can earn free of income tax. For the current 2013/14 tax year the personal allowance is £9,440.  People with taxable income of over £100,000 will have their personal allowance reduced or even removed. The reduction is a rate of £1 for every £2 of income over £100,000. This means that anyone with income over £118,880 will lose their personal allowance completely. This means that the tax rate on earnings between £100,000 and £118,880 is a massive 60{af331c3cb52abe27a47f1f5b71fb5068c938efb8d5a4e6cddc7f2780f48bb99c}. As the personal allowance increases, the range of income increases, resulting in more people being caught by this ‘Personal Allowance Trap’.

For those people (both employed and self employed) with earnings exceeding £100,000 there are planning opportunities worth consideration, which will obtain 60{af331c3cb52abe27a47f1f5b71fb5068c938efb8d5a4e6cddc7f2780f48bb99c} tax relief. These include:-

  • Increasing or making lump sum contributions into a personal pension scheme
  • Gift Aid donations to charities
  • Shifting income to a spouse of civil partner
  • Deferring income

If you are affected by the personal allowance trap then please feel free to contact us at DEB Chartered Accountants to discuss your options further.