High earners are the most affected by this week’s budget speech, with the announcement of the removal of the tax free threshold for individuals earning over £100,000.
The tax free threshold of £6,475 will no longer apply for earnings above £100,000 per annum. For most high income earners, this means missing out on thousands of pounds of tax free income that is currently protected by the zero rate income tax bracket.
£6,475 personal allowance taxed at 0%
£37,400 taxed at 20% = £7,4800
£56,125 taxed at 40% = £22,450
Total tax = £29,930
£0 personal allowance taxed at 0%
£37,400 taxed at 20% = £7,480
£72,600 taxed at 40% = £29,040
Total tax = £36,520
This means taxpayers are liable for £6,590 tax on the £10,000 earned over £100,000.
What can you do to avoid coughing up?
“One way to avoid this higher rate tax is to ensure you fall below the new £100,000 threshold.” says Raymond Ridgeway, Commercial Manager at 1st Contact. “This can be achieved in numerous ways depending on your tax structure.”
If you work through a Limited Company
“As a director of a limited company, the most tax efficient option would be to draw fewer dividends from the company so that you do not exceed the tax threshold. Contributing to a UK pension fund through your limited company fund by means of a salary sacrifice means that you can also save the employers and employees NI that would otherwise be due.”
If you work through an Umbrella Company
“If you work through an Umbrella Company like 1st Contact Umbrella, the most suitable solution is to claim business related expenses.” say Ridgeway. “This will enable you to reduce the amount of taxable salary and therefore your potential taxes. By asking your Umbrella Company to contribute to a pension you are also able to reduce the potential taxes and keep your tax able salary below the £100,000 tax bracket.”
1st Contact specialises in Tax, Finance and Migration and can be contacted on 0808 141 1663 (from within the UK) or 0207 759 7510 (from outside the UK) or by visiting www.1stcontact.com