Crossing the threshold

When your total income reaches certain levels, 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 personal savings allowance (PSA), personal allowance (PA) or pensions annual allowance.

Say you are a 20% taxpayer in 2021/22 but expect that a lump sum termination payment due in March 2022 will tip you into the 40% band (over £50,270). If you ask your employer to delay paying the termination payment until after 5 April 2022, you’ll pay the tax on that income later. You will also retain all of your 2021/22 £1,000 PSA and may still stay out of the 40% band for 2022/23. The main thresholds for 2021/22 are:
• PA: £12,570 – basic rate tax (20%) starts
• Higher rate threshold: £50,270 – 20% rate increases to 40% and PSA reduces from £1,000 to £500
• Married couples: transfer of £1,260 of PA is possible where the higher earner has income up to £50,270
• Child Benefit clawback: income between £50,000 and £60,000
• Withdrawal of PA: income between £100,000 and £125,140
• Additional rate threshold: £150,000 – 40% rate increases to 45%, Savings Allowance removed
• Pension annual allowance reduced where income (including employer pension inputs) above £240,000

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’.

Note, however, that moving earnings or dividends into 2022/23 will make them subject to the higher NIC and dividends rates that are being introduced.