Seven tax attacks to beware of when you move from the basic rate to higher rate tax band

Landlord Today has published an article by Sarah Coles, head of personal finance at Hargreaves Lansdown, on expert tax info for landlords.

The article can be read in full here, and provides information on seven tax traps that individuals may face when transitioning from the basic rate to higher rate tax bands. Additionally, it offers ten end-of-tax year strategies to help minimize tax liabilities. Here’s a summary:

Seven Tax Traps:

  1. Income Tax on Earnings: The income tax rate rises from 20% to 40% upon crossing the threshold into the higher rate tax band.
  2. Personal Allowance Withdrawal: Personal allowance is reduced by £1 for every £2 of adjusted net income above £100,000, resulting in an effective tax rate of 60% until the allowance is zero at £125,140.
  3. Dividend Tax: Higher rate taxpayers face increased tax rates on dividends, with allowances reducing from £1,000 to £500 in the next tax year.
  4. Capital Gains Tax (CGT): Higher rates of CGT apply after crossing the threshold, impacting gains on investments. The tax-free allowance decreases from £6,000 to £3,000 in the next tax year.
  5. Tax on Savings: Savings may be subject to higher income tax rates, and personal savings allowance decreases for higher rate taxpayers (£1,000 to £500).
  6. High-Income Child Benefit Tax Charge: Imposed at £50,000, leading to a repayment requirement for child benefit; full repayment occurs at £60,000.
  7. Loss of Tax-Free Childcare: Available until earning £100,000, after which parents no longer qualify.

Ten End-of-Tax Year Strategies:

  1. Pension Contributions: Higher rate taxpayers benefit from pension contributions, extending the basic rate tax band. Salary sacrifice schemes enhance benefits.
  2. High-Income Child Benefit Tax Charge Reduction: Pension contributions can reduce adjusted net income, aiding in cutting the high-income child benefit tax charge.
  3. Utilize Pensions to Address £100,000 Threshold: Pension contributions can reduce income, lowering tax at a 60% rate for income over £100,000.
  4. Optimize Capital Gains Tax Allowance: Use CGT allowances efficiently, considering the Bed and ISA process for moving assets into an ISA.
  5. Shelter Income-Paying Assets in ISAs: Utilize ISAs to shelter income-producing assets, benefiting from cumulative tax advantages.
  6. Consider Cash ISAs: Evaluate the benefits of cash ISAs, particularly if paying tax at a higher rate on savings interest.
  7. Plan as a Couple: For couples, transferring income-producing assets to the lower-taxed partner can optimize tax allowances.
  8. Consider Future Tax Position: Assess future tax positions, especially if transitioning to a lower tax band, to decide on delaying income or capital gains.
  9. Charitable Donations: Make tax-efficient charitable donations to reduce tax bills, with the added benefit of gift aid for charities.
  10. Venture Capital Trusts (VCTs): Consider VCTs cautiously, as they offer income tax relief (up to 30%) but involve higher risk.

These strategies aim to help individuals navigate tax traps and optimize their financial positions before the end of the tax year.

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