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 income | Tax | Net income | |
| Personal allowance | £9,440 | 0 | £9,440 |
| Basic rate tax @ 20% | £32,010 | £6,402 | £25,608 |
| Higher rate tax @ 40% | £58,550 | £23,420 | £35,130 |
| Total | £100,000 | £29,822 | £70,178 |
• Joan has an annual salary of £100,000 and £18,880 from deposit account interest
| Gross income | Tax | Net income | |
| Personal allowance | 0 | 0 | 0 |
| Basic rate tax @ 20% | £32,010 | £6,402 | £25,608 |
| Higher rate tax @ 40% | £86,870 | £34,748 | £52,122 |
| Total | £118,880 | £41,150 | £77,730 |
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
