InvestmentsJul 19 2013

Making use of the personal allowance

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Individuals with an income in excess of £100,000 have their personal allowance reduced by £1 for every £2 of income over £100,000, potentially reducing it to zero. Therefore no personal allowance would be allowed for anyone earning over £118,880.

Again, let us consider two individuals:

• Eric has an annual salary of £100,000

Gross incomeTaxNet income
Personal allowance£9,4400£9,440
Basic rate tax @ 20%£32,010£6,402£25,608
Higher rate tax @ 40%£58,550£23,420£35,130

• Joan has an annual salary of £100,000 and £18,880 from deposit account interest

Gross incomeTaxNet income
Personal allowance000
Basic rate tax @ 20%£32,010£6,402£25,608
Higher rate tax @ 40%£86,870£34,748£52,122

As Joan receives an additional income of £18,880 from a deposit account her tax liability increases by £11,328 (being £34,748 less £23,420), meaning that the portfolio income is effectively taxed at 60%.

Again, if this deposit account was held under an investment bond making use of the tax deferred withdrawals she would benefit from a full personal allowance and pay less tax.

When considering a client’s total income, it can be made up from a variety of sources including employment or self-employment, pensions or annuities, unit trusts, open-ended investment company (OEIC), bank interest and rental income. By replacing some of this income with bond withdrawals it is possible to reduce a client’s income tax liability, making full use of the allowances available.

Neil Jones is Technical Project Manager at Canada Life