Consider moving income or deductions around 5 April 2016.
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 This happens at several points, such as at £100,000, when personal allowances begin to be withdrawn and at £50,000, when child benefit starts to be clawed back.
If your total income in this tax year or the next year is expected to hover around one of those tipping points, you could save money by moving income or deductions from one year to the other.
For example, if you are a 20% taxpayer in 2015/16, but expect that a bonus in March 2016 will tip you into 40% tax for this year, you could ask your employer to postpone the bonus payment to after 5 April 2016. You'll pay the tax on that income later, and you may stay out of the 40% band as the 40% threshold will be higher for 2016/17.
The main thresholds are (2015/16 figure first, then 2016/17):
- basic personal allowance: £10,600 rises to £11,000 – basic rate tax starts
- higher rate threshold for income: £42,385 rises to £43,000 – 20% rate rises to 40%
- transfer of some allowance between married couple/civil partners: where recipient has income less than £42,385, rises to £43,000
- child benefit clawback: income between £50,000 and £60,000, after pension contributions or charitable donations (no change for 2016/17)
- withdrawal of personal allowance: income between £100,000 and £121,200 (£122,000 in 2016/17), after pension contributions and charitable donations
- additional rate: income above £150,000 – 40% rises to 45% (no change for 2016/17)
If your income falls in the band in which your personal allowance is withdrawn, your marginal income tax rate is effectively 60%, plus 2% National Insurance. For child benefit clawback the marginal rate can be much higher, depending on the amount of benefit received. This makes the tax saving on shifting income or deductions even more valuable.
Income that can easily be moved from year to year includes:
- bonus or salary from your own company
- dividends from your company
- distributions from discretionary trusts
It's also possible to adjust the timing of deductions for Gift Aid charity donations or pension contributions from year to year, as these can increase the value of a threshold that tip you into the higher tax rate.