Now that we are coming up to bonus time, we are getting more and more queries about the various nasty income tax thresholds. This is the key time where a bonus can tip you over from one income tax bracket to another.
We have written about the highest income threshold that is a problem (£260,000) beforehere.
The more common problems arise when your total taxable income takes you firstly over the £50,270 threshold and then over the £100,000 threshold.
Firstly, remember that taxable income includes Phoenix salary and bonus but also any additional taxable benefits that you receive. It also includes any bank interest you receive, any share dividends and any rental income. In essence, if it is taxable to income tax, it needs to be added together to work out which threshold you have exceeded.
For any income over £50,270 you will only get to keep 58% of it, as you will owe income tax at 40% and National Insurance at 2%.
For any income over £100,000 you will only get to keep 38% of it, as you will owe income tax at 60% and National Insurance at 2%. If you have young children you may find that in fact you don’t keep any of the money and you end up worse off than if you had income of less than £100,000, due to the loss of government funded free childcare hours.
This second rate of tax of 62% (67.5% in Scotland) might make you wonder if it is worth working or in fact whether you are working for your family of the tax man. This rate of tax persists until the income goes over £125,140 and then above that level it goes down to a ‘more modest’ 47%.
So if the tax man is going to keep a half to two thirds of your Phoenix bonus what can you do about it?
In extremis you could reduce your hours to a 4-day week, or less which Phoenix are generally very supportive of. A less extreme solution is to look at the various salary sacrifice options that Phoenix offers to reduce taxable income. You can sacrifice your bonus into your workplace pension and or more of your core salary. You can invest in the Phoenix Share Incentive Plan (if appropriate) or look at the Phoenix Electric Vehicle scheme, among other salary sacrifice benefits.
If you have assets that are adding to your income such as buy to lets, bank accounts, shares and other taxable investments and you are married, you can transfer these assets tax-free to your spouses. If their income is lower than the above levels, they can have the benefit of paying less tax than you would. Some staff members have concerns about transferring assets to a spouse in case of future divorce but frankly, the calculation of the split of assets in the event of divorce doesn’t favour the one owning the assets. Generally, the combined assets are split into half and reassigned (with adjustments for the cost of childcare).
In most cases we see, colleagues are paying high rates of tax either without realising it or without realising that the solutions are simple and effective. It would be great if we could all adjust what we are doing at these income levels so that we can keep just a little bit more of our hard earned money for ourselves.
