What is the highest rate of income tax in the UK?

ASK THE ACCOUNTANT – a weekly guide to the world of business finance with Warings Accountants

Q. What is the highest rate of income tax in the UK?

A. Many people may guess 40, 45 or 50 per cent. Actually, the highest rate is a startling 60 per cent!

The basic rules, taxed in the tax year to April 5, 2015, mean that on £0 to £10,000 no tax will be payable because each individual is entitled to a Personal Allowance, providing their income does not exceed £100,000.

The next £31,865 of taxable income is charged at 20%. Taxable income from £31,865 to £150,000 is charged at 40%, and taxable income over £150,000 is charged at 45%.

However, when your taxable income reaches £100,000 then for every £2 over that you lose £1 in Personal Allowances. So, if your net adjusted income is, say, £101,000 then on the additional £1,000 over £100,000 you will lose £500 of your Personal Allowance and hence on that £1,000 you will effectively be paying tax at a staggering rate of £600 (ie £1,000 at 40% plus £500 of lost allowances at 40%) which equates to an overall rate on the marginal amount of 60%.

This will continue for taxable income up to £120,000 at which point the whole of the Personal Allowance will have been clawed back. This may seem complicated but for people in this bracket, it’s worthy of further consideration.

There are things to consider to improve the situation where possible: for example, the transfer by way of gift of income-producing assets between husbands and wives/civil partners. This might include assets like investment properties, stocks and shares, bank deposits etc. By doing this, you may be able to ensure that your income is divided in a more tax effective manner not only to avoid the Personal Allowance abatement problem but also to ensure that each spouse/civil partner is making the best use possible of their Personal Allowances and 20% tax band.

Payments to pension schemes may be valid here, remembering generally that payments need to be made in the tax years for which relief is sought. There’s also the possibility of deferring bonuses or dividends to the following tax year. The key is in considering your personal taxation position, seeking good advice and planning ahead as well as you are able.

* For more help with finances go to www.warings.co.uk or call 01204 534031 or email PAL@Warings.co.uk