Now is the time to take stock
The school run is back on, nursery invoices are appearing in your inbox, and we’re about halfway through the tax year. This means you should have a decent idea what you’ll earn by the end of the tax year in April. The reason this is an important moment is that you still have around six months to do something about it if the numbers don’t look right.
If your income is about to cross the £100,000 mark with a pay rise, a promotion, extra income, or a bonus, your household can be left with less money than before. That’s not just on paper; that’s in real pounds in your bank account. Increases in your income above £100,000 could mean your personal allowance, free childcare hours at pre-school and your Tax-Free Childcare will disappear.
There is one important thing to understand before we get to the thresholds: the figure that matters is usually your ‘adjusted net income’, not simply your salary. It can include income from several sources and can be reduced by certain reliefs, like pension contributions and/or Gift Aid.
What happens when you hit £100,000?
Most people know that Child Benefit payments start to reduce when you hit £60k and end when you reach £80k. But there are several ££100,000 tax traps that can leave you significantly less well off.
You start to lose your personal allowance
Once your adjusted net income goes above £100,000, your personal allowance starts disappearing. You pay 40% income tax as normal, you also lose your personal allowance, £1 of it for every £2 you earn over ££100,000, plus 2% National Insurance. When you crunch the numbers, it means that every pound earned between £100,000 and £125,140 is effectively taxed at 62%.
The childcare cliff edge
For families using childcare, this is where the numbers can become particularly painful in England. You can lose up to 30 hours of free childcare. Plus, you’ll miss out on government money through the Tax-Free Childcare scheme.
Those last two do not taper. One pound over £100,000 and they are gone for the whole household, even if your partner earns very little. Each person is tested separately, so either one of you crossing the line means you miss out on this support. It can add up to a significant difference in how much you see in your bank account after you’ve paid for childcare.
What a £10,000 pay rise could look like
Take a couple where one partner earns £65,000 and the other earns £95,000, with two pre-school age children (under 3) eligible for the working-parent childcare offer. A £10,000 pay rise for the higher earner looks like good news. But once the personal allowance taper has taken effect, and the household loses its 30 hours of funded childcare and Tax-Free Childcare at the same time, that family can end up worse off, even though their income has gone up.
Pay rise: £10,000
Extra take-home: approximately £4,800
Extra Income Tax and employee NI: approximately £5,200
Potential childcare losses: For a family with two eligible young children, the Government says the working-parent funded childcare offer can be worth up to £15,000 a year in total. On top of that, Tax-Free Childcare can provide up to £2,000 per child per year towards additional childcare costs.
There are ways to reduce the impact
There are perfectly ordinary, well-established ways to bring your income back under those lines. Through sensible planning and forward thinking you can mitigate the impact these tax traps have on your income.
The key to dealing with the thresholds is timing. Some of the most effective options need to be in place before the money reaches you. If you suddenly realise in March that your bonus has taken your earnings to £103,000, your options will be limited.
Our family tax review
Our tax advice team will take a close look at your household income and work out what you are expecting to earn this year, from every source. Once we know the numbers, we’ll model the options available and show you the financial effect of each, so you can decide what makes sense for your household.
This review goes beyond the day-to-day advice and guidance we offer our clients on our monthly packages. It’s a thorough investigation into your household’s unique situation. In this review we will:
- Work out the expected adjusted net income of each partner for the tax year
- Calculate where you sit against the £60,000, £80,000, £100,000 and £125,140 thresholds
- Provide strategies and modelling of different options to reduce the impact of these tax traps
- Create a personalised report with a clear action plan to put in place before the end of the tax year
Do your homework early
Now is the time to act. Half the tax year has gone. The other half is available for planning. If you are a Maslins client, you’ll receive a discounted rate for this extensive and thorough review. If your income has shifted this year, or is about to get in touch with the team.
