Following on from my post of 1 May: What is the maximum dividend I can draw annually?, it is possible to draw more income without paying more tax despite breaching the higher rate or high income child benefit threshholds. Above the 40% tax band, tax is indeed payable at 40%, but there are two more bands where the effective rate of tax is much higher:
- £50-£60k, for people in receipt of child benefit, this is lost at a rate of 1% of the benefit for every £100 over £50k, an effective rate of 60%
- Similarly the personal allowance is lost once income is over £100k at a rate of £1 for every £2 earned upto £120k, again a effective rate of 60%
While these may appear set in stone there are some strategies which can help:
- Payments of gift aid and personal pension contributions increase the basic rate tax band, so increase the threshhold at which these 60% effective rates become active. You should ensure an payments are made by the higher earner in the family.
- Similarly any income which can be made to the lower earner rather than the higher earner may mean income is taxed at 20% (or indeed 0% if within their tax free allowance) not 60%. This is well worth thinking about if there is any way of transferring income earning assets (tax free between spouses), or controlling who receives the income.
- From April 2015, married couples will be able to transfer 10% of their personal allowance, potentially taking a £1,050 with no tax and using it against income attracting 60% effective rate. Well worth considering for the new tax year.
These are some of the options available to all taxpayers and will reduce tax bills but may not apply to your situation, so you should seek professional advice before taking any steps based on the contents. If you would like advice in this or other areas feel free to call. Alastair Wood, AW Accounting, Gravesend, Kent – Accountants who “speak your language”