Why a Pay Rise Can Cost More Than Expected
A higher income does not always mean you keep proportionally more of it. Two adjusted net income thresholds, £60,000 for the High Income Child Benefit Charge and £100,000 for the Personal Allowance taper, can create tax costs that are easy to miss.
We often see bonuses, dividends, rental income and one-off payments push people over a line they did not know was there. Your salary alone does not tell the full story. Pension contributions and Gift Aid donations can affect adjusted net income, so payslips are only part of the picture.
The £100,000 Personal Allowance Withdrawal
Once adjusted net income exceeds £100,000, your Personal Allowance starts to disappear. For every £2 above the threshold, £1 of allowance is lost. Under current rules, it is fully withdrawn once income reaches £125,140.
For taxpayers in England, Wales and Northern Ireland, this can create an effective 60% income tax rate on income within this range, before National Insurance where it applies. For example, an extra £10,000 of income can remove £5,000 of Personal Allowance. That means tax is charged not only on the extra income, but also on income that had previously been tax-free.
Scottish income tax rates and bands differ, so broad headlines about a “60% tax rate” may not reflect your exact position. We recommend looking at all taxable income together, including:
Employment income and bonuses
Business profits
Dividends and savings interest
Rental income and taxable benefits
This is where personal tax accountants can help identify a possible threshold issue before income is received.
The £60,000 Child Benefit Charge
The High Income Child Benefit Charge works differently. It is based on the adjusted net income of the highest earner in the household, not the person who receives the Child Benefit payments.
The charge begins once adjusted net income goes above £60,000. It rises by 1% of the Child Benefit received for every £200 of income above that point, reaching the full Child Benefit amount at £80,000.
A pay review or bonus can therefore lead to an unexpected repayment through the tax system. Depending on your circumstances, the charge may need to be reported through Self Assessment or collected through your tax code. Choosing not to receive Child Benefit payments is not always the best answer, as making a claim can still protect National Insurance credits in some cases.
Looking at Your Real Tax Position
These thresholds do not operate in the same way, but they both show why headline tax rates can be misleading. A dividend, bonus or rise in profits may affect income tax, Personal Allowance entitlement and Child Benefit repayments.
Couples also need to look at the issue from two angles. Child Benefit is based on the highest earner’s income, while Personal Allowance entitlement is assessed for each person separately.
Before making decisions, we encourage clients to forecast their likely income and reliefs. This may include:
Expected salary, bonuses and benefits
Profits from a business or property
Dividends, interest and other investment income
Eligible pension contributions and Gift Aid donations
Planning Before the Tax Year Closes
Eligible pension contributions may reduce adjusted net income and could help restore some Personal Allowance or reduce a Child Benefit charge. Gift Aid donations can also affect the calculation, provided records are kept and enough tax has been paid to support the relief.
For business owners and senior employees, the timing and mix of income may also be worth reviewing before decisions are finalised. Bonuses, dividends and other payments should only be adjusted where it is commercially appropriate and fully compliant.
An autumn review gives you time to estimate your position well before 5 April. Tax rules and thresholds can change, so checking the current figures and modelling the effect of expected income can prevent a surprise after the tax year has ended.
Make Your Tax Position Easier to Manage
Our personal tax accountants can help you understand how income thresholds may affect your tax position and identify practical next steps. At ABMV, we provide clear advice tailored to your circumstances. If you would like to discuss your position, contact us to arrange a conversation with our team.