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 Pensions Annual Allowance.
Taxpayers who live in Scotland have slightly different tax thresholds than those that apply in the rest of the UK (see above), but the principle is the same. You may be able to save tax by moving income from 2019/20 to 2020/21, or by making certain payments in 2019/20 rather than in 2020/21.
Say you are a 20% taxpayer in 2019/20, but expect that a bonus due in March 2020 will tip you into the 40% band (over £50,000). If you ask your employer to delay paying the bonus until after 5 April 2020, you’ll pay the tax on that income later. You should also retain all your £1,000 Savings Allowance, and may still stay out of the 40% band for 2020/21. We don’t yet know the 40% threshold for 2020/21 but it is likely to be at least £50,000.The main thresholds for 2019/20 are:
- basic Personal Allowance: £12,500 – basic rate tax (20%) starts
- higher rate threshold: £50,000 – 20% rate increases to 40% and Savings Allowance reduces from £1,000 to £500
- married couple’s allowance: transfer of 10% of Personal Allowance is possible where the higher earner has income of no more than £50,000
- Child Benefit clawback: income between £50,000 and £60,000
- withdrawal of Personal Allowance: income between £100,000 and £125,000
- additional rate: income above £150,000 – 40% rate increases to 45%, Savings Allowance removed, and pension annual allowance reduced
- 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’.