Divide and rule

Income is ‘cut up’ into tax years to decide whether you are subject to higher rates of tax or not in a particular year. Someone who goes over the income limit one year and has no income the next year pays much more tax than someone with a steady, level income of the same total amount year on year. If your income might fluctuate, it’s worth looking at ways to advance or delay the charge on that income in order to even out the tax rates.
The main tax rates are the same for 2012/13 and 2013/14, but the highest rate of 50% is reducing to 45% on 6 April 2013. The thresholds at which tax rates change are important for:

  • people with income of £100,000 a year – they start to lose the benefit of their tax-free personal allowance, creating an effective tax rate of 60% on the band up to £116,210 (2012/13) or £118,880 (2013/14);
  • people with income of £150,000 a year – they will pay income tax at a top rate of 45% from 6 April 2013.

If you are on the borderline or are likely to cross it next year, it will be worth moving income into whichever year has the lower income. That’s so even if you pay tax earlier as a result – 40% now is better than 45% in 12 months.

Income that can easily be moved from year to year includes:

  • salary (although PAYE means that the payment of the tax cannot be delayed for a whole year);
  • dividends from family companies;
  • distributions from discretionary trusts;
  • tax charges on cashing in some life insurance policies.

Of course, if the tax charge is going to be the same in either year, then most people would rather pay the tax later. If you receive a slab of income on 6 April rather than
5 April, you may pay the tax on it a whole year later. However, the 20% tax band is being squeezed down from £42,475 in 2012/13 to £41,450 in 2013/14. This means that more people will be paying at 40% next year, and makes the calculations even more important than usual.

It’s also possible to claim reliefs for some types of payment in particular years, to make sure that they reduce income taxable at the highest rate. These include pension contributions and charitable donations. There are limits on extra pension contributions, but if you haven’t paid the maximum or you’re thinking of giving money to charity, and your total income is around the £100,000 or £150,000 thresholds, it’s worth checking whether you should put the payment in one year rather than the other.

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