When your total income reaches certain thresholds, it tips any extra income into a tax band where a higher rate of tax is charged. This can also mean you lose part or all of your savings allowance, child benefit, personal allowance, or pension annual allowance.
The main trigger points are: £45,000, £50,000, £100,000 and £150,000. If your total income is expected to hover around one of those thresholds, you could save tax by moving income from 2016/17 to 2017/18, or by making certain payments in 2016/17 rather than in 2017/18.
Say you’re a 20% taxpayer in 2016/17, but expect that a bonus due in March 2017 will tip you into the 40% band. If you ask your employer to delay paying the bonus until after 5 April 2017, you’ll pay the tax on that income later. You will also retain all your £1,000 savings allowance, and may still stay out of the 40% band for 2017/18, as the threshold for that year will be higher.
The main thresholds are (2016/17 figure first, then 2017/18):
- basic personal allowance: £11,000 rises to £11,500 – basic rate tax (20%) starts
- higher rate threshold: £43,000 rises to£45,000 – 20% rate increases to 40%and savings allowance reduces from £1,000 to £500
- married couples allowance: transfer of 10% of personal allowance is possible where the higher earner has income of no more than £43,000, rises to £45,000
- child benefit clawback: income between £50,000 and £60,000 (no change for 2017/18)
- withdrawal of personal allowance: income between £100,000 and £122,000 (£123,000 in 2017/18)
- additional rate: income above £150,000 – 40% rate increases to 45% (no change for 2017/18), savings allowance removed, and pension annual allowance reduced
Gift Aid donations and pension contributions can increase the value of most of the above thresholds. You can elect for donations to be treated as being paid in the preceding year.
Income that can easily be moved from year to year includes:
- bonus from your own company
- dividends from your company
- encashments of life assurance bonds
- withdrawal of taxable income from pension schemes in ‘drawdown’