When your total income reaches certain thresholds, it tips any extra income into a tax band where a higher rate of tax is charged. This can also mean you lose part or all of your Savings Allowance, Child Benefit, Personal Allowance, or Pensions Annual Allowance.
Say you are a 20% taxpayer in 2020/21 but expect that a lump sum termination payment due in March 2021 will tip you into the 40% band (over £50,000). If you ask your employer to delay paying the termination payment until after 5 April 2021, you’ll pay the tax on that income later. You will also retain all of your 2020/21 £1,000 Savings Allowance and may still stay out of the 40% band for 2021/22. We don’t yet know the 40% threshold for 2021/22 but it is likely to be at least £50,270.
The main thresholds for 2020/21 are:
• Personal Allowance: £12,500 – basic rate tax (20%) starts
• higher rate threshold: £50,000 – 20% rate increases to 40% and Savings Allowance reduces from £1,000 to £500
• married couples: transfer of 10% of Personal Allowance is possible where the higher earner has income of no more than £50,000
• Child Benefit clawback: income between £50,000 and £60,000
• withdrawal of Personal Allowance: income between £100,000 and £125,000
• additional rate threshold: £150,000 – 40% rate increases to 45%, Savings Allowance removed, and
• pension annual allowance reduced where income (including employer pension inputs) above £240,000
Income that can easily be moved from year to year includes:
• bonus from your own company
• dividends from your company
• encashments of life assurance bonds
• withdrawal of taxable income from pension schemes in ‘drawdown’.