As part of the drive to increase tax revenues HMRC will be reducing your personal tax allowance of £6,475 in 2010-11, if your taxable income exceeds £100,000. They will knock £1 from your allowance for every £2 your income exceeds £100,000. Your personal allowance will be eliminated when your earnings reach £112,950.
The extra tax you will pay on the top £12,950 of your earnings is 40% of the £12,950 plus 40% of the lost personal allowance (£6,475 x 40%), a combined 60% tax charge. If you take into account the extra 1% NIC charge, a not inconsiderable 61% marginal rate!
Accordingly anything you can do to reduce your income back below £100,000 will save you up to 61% in reduced tax and NIC.
Careful planning of capital expenditure to make use of the Annual Investment Allowance (AIA) could be the key; or perhaps a salary sacrifice or increase in pension contributions? You could also consider a gift aid donation.
Planning is obviously critical - call if you would like us to design a strategy to safeguard your tax allowance, should it be under threat.
in: Contractor Tax