What salary do I have to earn to get caught by 40% tax?
Generally each year the amount that you can earn before having to pay higher rate tax (which is currently charged at the rate of 40%) is increased by the government and 2016/17 is no different.
In 2015/16 there was a personal allowance of £10,600 and an allowance of £31,785 which was charged at the basic rate of 20% so in effect you could earn £42,385 before you fell into the 40% tax bracket.
In 2016/17 both the personal allowance and the 20% tax band have been increased to £11,000 and £32,000 respectively so that (assuming you are entitled to the full personal allowance), you could earn up to £43,000 before having to pay any tax at 40%.
Of course it is possible that you may have a different personal allowance or you may have to take into account other earnings or benefits in kind that may take you over the threshold.
However, one benefit in 2016/17 is that you now have a personal savings allowance of £1,000 if you are in the lower rate tax bracket or £500 if you are in the higher rate tax bracket so you will not need to pay tax on savings interest under this amount.
The increase from £42,385 to £43,000 is effectively a 1.45% increase so it is quite possible that if you were close to the threshold in 2015/16 and you have had an increase in your income, that you may now get caught in the 40% tax bracket.
In recent years there have been a lot of changes to personal allowances and indeed other allowances that affect personal income. Not only has the personal allowance increased significantly and more recently a tax free savings allowance was introduced, now there is another change to the tax charged on dividend payments to individuals.
The changes are a little bit complex and will affect quite a lot of people receiving dividend income, and not always for the better.
There is a new allowance of £5,000 per person per year on dividends which is tax free, but any dividend income over this amount will be taxed at a higher rate than previously, depending on the tax bracket of the individual.
A basic rate tax payer will need to pay 7.5% tax on amounts over £5,000, a higher rate tax payer will need to pay 32.5% and an additional rate tax payer will need to pay 38.1%.
These rates are effective from April 1016.
It may be useful to note that the new £5,000 savings tax free rate is in addition to this (for those who have low enough incomes) and so it may be worth getting some advice as to whether some shares should be switched to a different investment vehicle to minimise tax.
The chancellor George Osborne this week announced in his extra budget that the figure at which the 40% tax band kicks in will be increased from 2016 to £43,000 from the current level for 2015/16 of £42,385.
The 2015/16 figure of £42,385 is made up of the £10,600 personal allowance and the 20% tax band amount of £31,785.
Next year’s figure is made up of the new £11,000 personal allowance and a 20% tax band amount of £32,000.
Whilst the personal allowance had been increasing, the 20% tax band allowance had been decreasing in recent years so this is the first increase for a while which brings it back up to the level it was in 2013/14.
There is a point when you get to earning £100,000 a year where the personal allowance becomes a bit more complicated as the allowance is withdrawn gradually on earnings over this level. Some people refer to this as the £100k tax trap.
Basically the personal allowance is reduced by £1 for every £2 of earnings over £100,000. This means that one your earnings reach twice as much as the personal allowance, plus £100,000, you will no longer be entitled to any personal allowance and all of your earnings will be taxable.
Therefore your personal allowance and tax bands would be as follows, depending on your earnings:
Please note that these figures are purely theoretical and may not apply to your own personal tax circumstances as there may be other factors affecting your personal allowances and taxable income. This is just intended as a basic guide to illustrate how the personal allowance decreases after your earnings exceed £100,000.
Please take financial advice if you are in any doubt about your own personal tax circumstances.
A number of changes were announced by the Chancellor George Osborn yesterday, but there were only a couple of changes that affected UK tax allowances.
Key Points from the UK Budget 2013 with regard to UK Tax Allowances:
The plan was always to increase the personal allowance to £10,000 by 2015 but this has now been brought forward by a year and the £10,000 UK tax allowance will now be effective from 6 April 2014. This is the amount that people can earn before being charged any income tax. However, National Insurance contributions are still payable on earnings over £7,606 at the rate of 12%.
Corporation tax will decrease from April 2015 to 20% from the previous rate of 21%, which in itself is payable from April 2014. In fact the rate has been reduced significantly from the 28% it is in 2012/13 to 24% in 2013/14, giving the UK one of the lowest rates of corporation tax.
On 6th April 2009 the Inheritance Tax threshold was increased to £325,000. it had been increasing steadily over a number of years since there was consternation among the general public that the level of the allowance would mean that the majority of people who had houses of a decent size would be impacted by the tax.
However, once it reached the level of £325,000 the amount remained static and there is no plans to increase it until at least after 5 April 2015.
Although a 10% starting rate of personal income tax was introduced by Gordon Brown in 1999 as the lowest rate of tax, it was also discontinued by him in 2008 to make way for the abolition of tax for earnings up to £10,000 which was planned to be introduced on a gradual scale. Continue reading Is There Still a 10% Tax Rate?