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News
Think ahead on income tax
Last November's Pre-Budget Report announced a variety of proposed changes to income tax and national insurance contributions (NICs) over the next three tax years.
2009/10
The main personal allowance will rise to £6,475 and the basic rate limit will increase from £34,800 to £37,400. These improvements are countered by a substantial increase in the upper level at which full rate NICs are paid - from £40,040 to £43,875.
2010/11
Personal allowances will be restricted for high earners in a complex two-stage approach:
1. If your gross income is between £100,000 and £140,000, your personal allowance will be reduced by £1 for each £2 of income over £100,000, subject to a maximum total reduction of half the personal allowance. So assuming a personal allowance of £6,600, your personal allowance will be halved (to about £3,300) if your income is above about £106,600.
2. If your gross income exceeds £140,000, your personal allowance will be reduced again by £1 for each £2 of income over £140,000. As a result, you will have no personal allowance if your income is more than around £146,600.
These phased reductions create two bands of income about £6,600 wide, where the effective marginal tax rate is 60%.
2011/12
In this tax year:
• NIC rates for employees, employers and the self-employed will rise by 0.5%.
• There will be a new 45% income tax rate (37.5% for dividends) for taxable income above £150,000.
Some changes are not due to take effect until after the next general election. However, such is the hole in the public finances that it makes sense to assume the proposals will become law and start planning accordingly:
• If you are married or in a civil partnership, make sure that you are taking maximum advantage of independent taxation.
• If you could be caught by the personal allowances restriction, review whether it will be possible to avoid the 60% marginal rate band.
• If paying 45% income tax from 2011/12 is a possibility, think about bringing forward income into an earlier tax year.
• Capital gains, taxed at 18%, might be preferable to income.
If you want to examine future tax planning further, a good starting point would be to raise the issue as part of your tax year end planning review.
The Financial Services Authority does not regulate tax advice.
Last November's Pre-Budget Report announced a variety of proposed changes to income tax and national insurance contributions (NICs) over the next three tax years.
2009/10
The main personal allowance will rise to £6,475 and the basic rate limit will increase from £34,800 to £37,400. These improvements are countered by a substantial increase in the upper level at which full rate NICs are paid - from £40,040 to £43,875.
2010/11
Personal allowances will be restricted for high earners in a complex two-stage approach:
1. If your gross income is between £100,000 and £140,000, your personal allowance will be reduced by £1 for each £2 of income over £100,000, subject to a maximum total reduction of half the personal allowance. So assuming a personal allowance of £6,600, your personal allowance will be halved (to about £3,300) if your income is above about £106,600.
2. If your gross income exceeds £140,000, your personal allowance will be reduced again by £1 for each £2 of income over £140,000. As a result, you will have no personal allowance if your income is more than around £146,600.
These phased reductions create two bands of income about £6,600 wide, where the effective marginal tax rate is 60%.
2011/12
In this tax year:
• NIC rates for employees, employers and the self-employed will rise by 0.5%.
• There will be a new 45% income tax rate (37.5% for dividends) for taxable income above £150,000.
Some changes are not due to take effect until after the next general election. However, such is the hole in the public finances that it makes sense to assume the proposals will become law and start planning accordingly:
• If you are married or in a civil partnership, make sure that you are taking maximum advantage of independent taxation.
• If you could be caught by the personal allowances restriction, review whether it will be possible to avoid the 60% marginal rate band.
• If paying 45% income tax from 2011/12 is a possibility, think about bringing forward income into an earlier tax year.
• Capital gains, taxed at 18%, might be preferable to income.
If you want to examine future tax planning further, a good starting point would be to raise the issue as part of your tax year end planning review.
The Financial Services Authority does not regulate tax advice.