Ilyas Patel Accountants in Preston
Beyond earning £100,000, two significant financial drops present themselves: the loss of free childcare and the tapering of the income tax-free personal allowance.
Together, these can impose a marginal tax rate of 60% and create unexpected financial strain. So, what can you do to stay below this cliff edge?
(Read Time: Approx. 4 minutes)
Crossing the £100,000 income threshold introduces two major pitfalls: the gradual loss of your personal allowance and the total loss of free childcare for those with young children.
For every £2 earned above £100,000, £1 of your personal allowance is withdrawn.
This results in a marginal tax rate of 60% on earnings between £100,000 and £125,140.
The bigger issue for many, though, is the loss of free childcare. If one parent’s earnings exceed £100,000, you lose the entitlement altogether.
For families with two children under three, this could mean missing out on up to £20,000 a year in childcare support, a substantial loss, especially in high-cost regions like London.
The rules are strict when it comes to calculating your income.
It includes earnings from employment, rental income, and other taxable sources, minus allowable deductions such as pension contributions and charitable donations.
If you find your earnings creeping above the £100,000 mark, several strategies can help you reduce your taxable income, keeping you within the limits to retain benefits like free childcare.
The most effective way to reduce your adjusted net income is to make pension contributions.
Every £1 you contribute to a pension reduces your taxable income by the grossed-up amount, which includes the tax relief at source.
This means that for every 80p you contribute, £1 is deducted from your taxable income.
By increasing your pension contributions, you can bring your adjusted income below £100,000, helping to avoid the cliff edge while also boosting your retirement savings.
Charitable donations are another tool to lower your income.
Gift Aid allows you to deduct the gross value of your donations from your earnings.
Like pension contributions, the government tops up your donations, so an 80p donation effectively reduces your taxable income by £1.
This is an excellent way to combine tax efficiency with philanthropy.
If your earnings approach £100,000, careful planning is essential to avoid losing free childcare and enduring a 60% marginal tax rate.
Pension contributions and charitable donations are powerful tools to reduce your taxable income, keeping you within the benefits threshold.
For landlords, deducting allowable expenses and considering alternative investments can help soften the financial blow.
At Ilyas Patel Accountants, we specialise in helping individuals navigate complex tax scenarios and optimise their financial strategies.ffairs are structured to minimise tax liabilities.
Fill out our form here for any questions, give us a call at 01772 788200, or message us on our WhatsApp for out of office hours.
Kind regards,
Ilyas Patel