Reducing Tax on One-Off Income

February 2021
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A spike in income via a one-off payment, for example a bonus, overtime, pay in lieu of notice or backdated holiday pay could result in a much bigger tax bill or loss of other tax perks. We explain how this could arise and how to restore them.

Income Tax  

Our income tax regime is progressive, so that as taxable income increases, the rate of tax paid on each slice increases from 0%, 20%, 40% and 45% (0%, 19%,20%,21%,41% and 46% in Scotland)
Some income tax allowances are made available or withdrawn when income is below or above certain figures. The annual income levels to watch out for are £12,500 -£17,500, £50,000, - £60,000 and £100,000- £125,000. 

Making pension savings or gift aid donations reduces taxable income which restores allowances and saves tax. Below are some examples of how this might work. 

Personal Allowance 

Most UK taxpayers are not taxed on the first £12,500 of their taxable income.

This personal allowance is withdrawn gradually when annual taxable income is over £100,000. For each £2 over, £1 of the allowance is withdrawn, so that once over £125,000 of taxable income no personal allowance is left, costing the taxpayer up to £5,000 per year. 

If income is reduced below £125,000 the allowance is restored, on sliding scale, so that the full £12,500 is available once income is below £100,000.

Married Couples & Civil Partners   

Married couples and civil partners, where one has taxable income below £12,500, and the other between £12,500 and £50,000, may claim marriage allowance. This is worth up to £250 in the current year. Eligible couples may claim up to 4 years arrears of up to £1,188 in total.

A one-off payment pushing income over £50,000 would make them ineligible for marriage allowance with the higher earner taxed on the additional allowance. By reducing income with pension savings or gifting to charity the allowance would remain tax free. 

Families with Children

Most families with children under age 16, or in full time education to age 19, get tax free child benefit, worth £21.05 per week for the eldest and £13.95 per week for each younger child.  Where one adult in the family has income over £50,099, they pay tax progressively on this benefit. Once income reaches £60,000 it is all taxable.  

Making a one-off pension saving or gift aid donation could restore some or all of the tax- free benefit. 

Tax Free Childcare

Where both parents are working a minimum of 16 hours per week and earning at least the National Living Wage/ Minimum Wage, help with paying for childcare for under 12s is available from HMRC.

Parents may save up to £8,000 per year per child in a tax-free childcare account with a 25% subsidy of up to £2,000 per year per child added to their savings. This is then used to pay for childcare with a registered provider. 

If one adult has taxable income of more than £100,000, they are ineligible but making pension savings or charitable donations reduces the income which counts to restore eligibility. 

Savings Income 

Taxpayers have a tax -free allowance for savings income of £1,000 if a basic rate taxpayer (income up to £50,000) falling to £500 if a higher rate taxpayer (income between £50,001 and £150,000) *. Those with income over £150,001 get no allowance.  *£43,430 - £150,000 for residents of Scotland.

Where earned and property income is below £12,500 an additional £5,000 of savings income can be received tax free. The £5, 000 savings income allowance is reduced pro rata where taxable earned and property income is between £12,500 and £17,500.  A rise in taxable income could mean more savings income becomes taxable. Pension savings or charitable gifts can reduce the taxable income below these thresholds and restore tax free savings income.

Student Loan Repayment 

Student Loan repayments are deducted via PAYE at a rate of 9% of pay above the earnings threshold of £26,575 (£19,390 for pre 2012 loans).  A one- off increase in pay increases the repayment deducted. Where this represents an overpayment for the year, a reclaim can be made at the end of the tax year by calling the Student Loan Company on 0300 100 0611. Pension savings or gift aid reduce the student loan repayment required. 

To explore how you might restore eligibility for tax allowances please contact your usual LEBC adviser, email or call 0800 055 6585.

Kay Ingram                            
Public Policy Director   

Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. The contents of this blog are for information purposes only and do not constitute individual advice. All information is based on our current understanding of taxation legislation and regulations. The Financial Conduct Authority does not regulate estate planning, tax advice, wills or trusts.                             

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