Date post: | 24-Jan-2015 |
Category: |
Economy & Finance |
Upload: | lwm-consultants-ltd |
View: | 191 times |
Download: | 2 times |
Investors in Values
LWM Consultants Ltd.
£100,000 Income Trap
“if your adjusted net income exceeds £100,000 you could be in for a shock…..”
Budget changes – 5 April 2010
• Personal tax free allowance will be withdrawn by £1 for every £2 that adjusted net income is over the £100,000 limit
• Income is made up of for example:o Earnings from employment and / or self
employmento Most pension incomeo Interest on most savingso Income from shares (dividend income)o Life policy chargeable event gaino Rental incomeo Income received by an individual from a trust
Income = global income not just PAYE Income
Example – earnings £124,000
Old Rules New Rules
Nil Tax £7,475 Nil
20% tax £35,000 £35,000
40% tax £81,525 £89,000
Tax due £39,610 (31.94%)
£42,600 (34.35%)
Reduction in take home pay
£249.16 per month
Making the allowance work for you
• Rather than making the allowance work for the tax man, you can make it work for you
• Examples of what can be offset against your income:o Gross pension contributions including salary
sacrifice o Charitable donations (gift aid donations, gifts of
shares or property)
• And if you own your business you can spread your income to lower rate tax payers in your family
Example A– earnings £124,000
• Assuming your net adjusted income is £124,000 in 2011 / 12
• You are paying £2,000 a month to your pension
Example A– earnings £124,000
No pension Paying a personal pension contribution
Taxable Income £124,000 £124,000
Personal Allowance £0.00 £7,475
National Insurance £5,861 £5,861
Tax £42,600 £34,810
Employee pension contribution (net)
£0.00 £19,200
Net income £75,539 £64,129
Effective tax relief 52%
Example A– benefits
• Retains personal allowance, so doesn’t have to pay additional tax
• A contribution of £24,000 costs just £11,410 in real terms (i.e. 52% tax relief)
• i.e. the allowance is now working for you
Example B– earnings £124,000
• Assuming your net adjusted income is £124,000 in 2011 / 12
• You arrange for your pension contribution to be paid as a salary sacrifice so the net income is the same as if you were paying the contribution
Example B– earnings £124,000
No pension Pension Contribution paid via salary sacrifice
Taxable Income £124,000 £99,172
Personal Allowance £0.00 £7,475
National Insurance £5,861 £5,364
Tax £42,600 £29,679
Employee pension contribution (net)
£0.00 £0.00
Net income £75,539 £64,129
Employer contribution
£0.00 £28,254
Effective tax relief 59%
Example B– benefits
• Retains personal allowance, so doesn’t have to pay additional tax
• Pension contribution increases by £4,254 to £28,254
• Cost of contribution of £28,254 is just £11,410, effective 59% tax relief
• i.e. the allowance is now working for you
Next step• We are not tax experts but we don’t want you to
fall into the trap
• Speak to your accountant and discuss the best solution with them
• Plan now and avoid a nasty shock
LWM Consultants Ltd are not tax advisers. This is based on our understanding of current UK tax laws which may be subject to change. The NI, tax and allowances
are based on the 2011 / 12 tables. If you require further advice we would recommend you speak to your accountant.
LWM Consultants Ltd is an appointed representative of Sense Network Limited, which is authorised and regulated by the Financial Services Authority. Registered in England and Wales under Company Number 07408315. Registered Office: The
Garden Suite, 23 Westfield Park, Redland, Bristol, BS6 6LT