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Marginal Tax Rates
Newsletter issue - June 2014
What rate of tax would you pay on an additional £1 of earnings? If your annual income is between £41,865 and £150,000 you may think the tax rate would be 40%, but the peculiarities of the UK tax system mean you could pay much more.
To start with earned income above the 40% threshold carries a national insurance charge (NICs) of 2% so for every £1 you earn above £41,865 (for 2014/15) you will pay 42% in tax and NICs.
Child benefit is withdrawn from the highest earner in the family at the rate of 1% of the benefit for each £100 of income exceeding £50,000 per year. This translates into an effective marginal tax rate of 60% on income between £50,000 and £60,000.
When your income exceeds £100,000 your personal allowance is withdrawn at the rate of £1 for every £2 of income above £100,000. This is an effective tax rate of 62% including NICs.
From 6 April 2015 married couples will be able to transfer up to 10% of their personal allowance between them. This will allow up to £1,050 of the allowance to be transferred from the person who earns less than £10,500, to their spouse who earns up to the 40% threshold. Thus £1 of additional income that takes you over the 40% threshold will mean you lose the whole of that transferable allowance - an infinite marginal tax rate.
If you are able to control the level of your taxable income, perhaps because you run your own business, it makes sense to adjust your income to avoid those high marginal tax rates. Perhaps you could employ other members of your family, or take them into business with you as partners, to spread the business income.
Payments of pension contributions and Gift Aid donations can stretch your 40% threshold, so the higher earner in the family should making those charitable donations and pay pension contributions. We can help you plan to avoid the highest tax rates and make the best use of all allowances available.
What our clients say about us...
"Paul has provided accountancy services to my company for 2 years now. I can recommend Paul very highly; his skills as an accountant are highly detailed and professional and he is always available to provide advice. One aspect of the way Paul works that I greatly appreciate is a preference to meet face to face when there is a detailed conversation to be had. I personally find this more productive and is a benefit of working with a small accountancy firm that you wouldn't get with the large faceless providers."
ALISTAIR FAIRWEATHER - PROGRAMME & PROJECT MANAGER, DELIVERING/RESCUING I.T. 7 BUSINESS CHANGE WITH BUDGETS UPTO £50M INC SUPPIER MANAGEMENT
"I couldn't ask for more from Paul as an Accountant. Paul has been accountant to Work Relief Charity Recruitment for just over a year now and is proving an invaluable asset. Accurate, knowledgeable, flexible with an emphasis on service delivery, I would recommend Paul's services to any organisation looking for an accounts professional."
Neil Price - Managing Director at Work Relief Charity Recruitment
"Paul was a referral from a family member when I started my business 2 years ago. As this was the first time I had ever run my own company I was totally clueless over the financial side of matters and was worried that I may have made mistakes in any of my accounting. I needn't have worried as after enaging Paul for a set monthly fee he was always there on the end of the phone for all sorts of questions I had and no matter how trivial they were Paul gave me all the information I required and more and did an excellent and painless job at the end of my first year! Couldn't ask for any better to be honest. Just two words - hire him!!!"
Lee Westrap MBCS - Director - Bulldog IT Services
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