PART 3 – Is there anything else I can do to ensure my entitlement to the personal allowance of £12,500?
Parts 1 and 2 of this series considered the tax savings of pension contributions and charitable donations. They also discussed the effect that they can have on ensuring you are still able to receive a full personal allowance of £12,500 when your net income is over £100,000. Most UK taxpayers are entitled to a personal allowance, meaning for 2019/20 that the first £12,500 of income is tax-free!
When a person’s adjusted net income exceeds £100,000 the personal allowance is tapered down by £1 for every £2 over this threshold. Therefore, when someone’s net income exceeds £125,000, they will not be entitled to any personal allowance at all.
Consideration should always be given to passing income generating assets between spouses/civil partners. For example, if your total income was £110,000, which included £100,000 salary and £10,000 interest from an investment portfolio and your spouse/civil partner’s total income was £30,000 made up of a £29,000 salary and £1,000 bank interest, you may wish to consider transferring the portfolio into your spouse/civil partner’s name. The marginal rate of tax on the income between £100,000 and £110,000 is 60%. So, although you are receiving £10,000, your net income from the investments after tax is only £4,000. If the portfolio is transferred to your spouse/civil partner this will be taxable in their basic rate band at 20%, leaving £8,000 after tax for you to enjoy, an additional £4,000!
Please note this is from a tax perspective only and separate advice should always be sought from an independent financial advisor on your personal assets and income needs.