Losing your personal tax allowance

If you earn over £100,000 in any tax year your personal allowance is gradually reduced by £1 for every £2 of adjusted net income over £100,000 irrespective of age, so you end up losing your personal tax allowance by the time your earnings reach £125,140. This means that any taxable receipt that boosts your income over £100,000 will result in a reduction in personal tax allowances. Accordingly, your personal Income Tax allowance would be reduced to zero if your adjusted net income is £125,140 or above.

Your adjusted net income is your total taxable income before any personal allowances, less certain tax reliefs such as trading losses and certain charitable donations and pension contributions.

For the current tax year if your adjusted net income is likely to fall between £100,000 and £125,140 you would pay an effective marginal rate of tax of 60%.

If your income sits within this band you should consider what financial planning opportunities are available in order to avoid this personal allowance trap by reducing your income below £100,000. For example, by giving gifts to charity, increasing pension contributions and participating in certain investment schemes.

A higher rate or additional rate taxpayer who wanted to reduce their tax bill could make a gift to charity in the current tax year and then elect to carry back the contribution to 2022-23. A request to carry back the donation must be made before or at the same time as the 2022-23 Self-Assessment return is completed and filed, i.e., by 31 January 2024.

Losing your personal tax allowance can be reversed if you get advice, and take action, in good time. If you require any advice then please don’t hesitate to get in touch with the team at HFM.