Withdrawal of Personal Allowance

I am currently employed on a salary of £112,000 per year and have noticed that my tax code has been changed to reduce my personal allowance. Can you explain why this loss of personal allowance has happened?

 

Withdrawal of Personal Allowance

 

For the past number of tax years the personal allowance has been removed at a rate of £1 for every £2 of income above £100,000.

In the case of an income of £112,000 this would reduce your personal allowance by £6,000.

For example, a standard personal allowance for 2015-16 of £10,600 would now be shown as £4,600.

Effectively because of this reduction of the personal allowance by £6,000, this means that £6,000 of income is now attracting 40% tax where it was attracting 0%, which means that the effective marginal rate of tax between £100,000 & £112,000 is 60%.

In absolute terms the extra £12,000 of income equates to only £4,800 when income tax has been deducted.

The loss of personal allowance is only prompted if your ‘adjusted net income’ exceeds £100,000.

For most taxpayers this figure will be exactly the same as total income. However, if you were to pay into a private pension or make charitable donations this has the effect of reducing your adjusted net income and will save tax you at the marginal rate of 60% which is certainly something to consider as a way to bring you back below £100k.

One thing to be aware of is that often your tax code will not have been adjusted to reduce your personal allowance if you are in the first year or two of earning over £100k – you should make sure you look at what tax code you are on (it will be on your payslip) and make sure it looks correct.

Your tax code has been reduced by HMRC as they are assuming you will be earning over £100k in the tax year, probably on the basis that you did in the prior tax year. Your tax code will only include an estimate of what your personal allowance withdrawal will be so you should check you agree with it and if you don’t then you can speak to HMRC to ask them to amend it.

Many HR / payroll departments do not understand this withdrawal of the personal allowance – although it is not their responsibility to question a tax code it would be useful if they were pro actively helping their high earning employees to make sure they understand their own tax codes.

Where a tax code has not factored in the withdrawal of the personal allowance and an employee does earn over £100k this can result in some substantial amounts of tax owed.