Are you earning above £100k per year through PAYE and other Net Income received, and are you completing a self-assessment tax return? Have you considered appropriate tax planning advice?
For a taxpayer if your income is over £100,000 per annum (even through PAYE), then you will be required to complete a Self-Assessment Tax Return. This is because most payroll software cannot cope with the adjustment in Tax Free Personal Allowance that is required.
The Tax-Free Personal Allowance goes down by £1 for every £2 that your adjusted net income is above £100,000, this means that, if your adjusted net income is £125,140 or above, then your Tax-Free Personal Allowance will be reduced to ZERO.
Tax Planning
With the correct advice and guidance, you can look to legitimately reduce your adjusted net income to below the £100,000 or mitigate some of the adjustments to your Tax-Free Personal Allowance.
Adjusted Net Income
Working out your adjusted net income can be quite complicated; the below is guidance as per HMRC’s website
https://www.gov.uk/guidance/adjusted-net-income#what-is-adjusted-net-income
Adjusted net income is total taxable income before any Personal Allowances and less certain tax reliefs, for example:
- trading losses
- donations made to charities through Gift Aid – take off the ‘grossed-up’amount
- pension contributions paid gross (before tax relief)
- pension contributions where your pension provider has already given you tax relief at the basic rate – take off the ‘grossed-up’amount
Working out your net income:
Step 1 – work out your ‘net income’
Add up your taxable income. Including like:
- Money you earn from employment (including any benefits you get from your job)
- Profits you make if you’re self-employed including from services you sell through websites or apps.
- Some state benefits.
- Most pensions (including the State Pension, company and personal pensions and retirement annuities)
- Interest on savings and pensioners bonds
- Dividends from company shares
- Some rental income
- Income from a trust
Take off any tax reliefs that apply:
- Payments made gross to pension schemes– those that have been made without tax relief
- Trading losses, for example trade loss relief or property loss relief
This is your ‘net income’.
Your net income is then adjusted – steps 2 to 4 below.
Step 2 – take off Gift Aid donations
If you made a Gift Aid donation, take off the ‘grossed-up’ amount – what you paid plus the basic rate of tax.
For every £1 of Gift Aid donations you made, take £1.25 from your net income.
Step 3 – take off pension contributions
If you made a contribution to a pension scheme where your pension provider has already given you tax relief at basic rate, take off the ‘grossed-up’ amount – what you paid plus the basic rate of tax.
For every £1 of pension contribution you made, take £1.25 from your ‘net income’.
Step 4 – add back tax relief for payments to trade unions or police organisations
Tax relief of up to £100 is available if you make payments to a trade union or police organisation for superannuation, life insurance or funeral benefits.
If you took off an amount for this type of payment at step 1, add it back.
