Your Personal Allowance starts to be stripped back once you earn above £100,000.
Given the financial pressures we all face at the moment, it is sensible to make the most of every tax break open to you.
After all, there’s no point handing more cash over to the Treasury than is strictly necessary.
Which is why it’s somewhat troubling that a million workers face the prospect of losing one of the most significant tax breaks on offer today.
Bye bye Personal Allowance
The Personal Allowance is a big tax break for many of us, and it has grown in importance ‒ and size ‒ in recent years.
The Personal Allowance essentially sets out how much you can earn each year before you have to start paying tax on your income.
And it is currently set at £12,500, having been increased steadily over the last decade.
However, while the Personal Allowance is available to everyone, it does start to be stripped back if you are a particularly high earner. Once your net income moves beyond £100,000, then you start to lose some of that Personal Allowance.
It works like this. For every £2 above £100,000 that you earn net of tax, your Personal Allowance drops by £1.
As a result, if you earn £125,140 or above, then there is no Personal Allowance at all, meaning you pay Income Tax on every single penny that you earn.
Rising wages
Now, for many of us, the thought of earning so much in a year that our Personal Allowance is stripped back is fanciful. However, the reality is that the current economic situation is actually pushing greater numbers towards this point.
Analysis by the Telegraph found that in 2019-20 ‒ the most recent year for which there are figures ‒ around 950,000 people earned between £75,000 and £100,000.
However, since then we have seen astonishing wage growth.
The rate of annual growth in pay packets hit 7% in the first quarter, according to data from the Office for National Statistics.
This isn’t a one-off bump either ‒ pay growth has been significant for some time.
Indeed, it was precisely because of the way wages were growing that the Government last year tweaked the State Pension triple lock, removing the link to wage growth for a year, over concerns that it would lead to a bumper rise for pensioners.
We have even had the frankly farcical situation of the Governor of the Bank of England, Andrew Bailey, calling on people not to ask for big pay rises given the current rate of inflation and fears that further wage rises would make the situation worse.
While it’s a challenging time for many of us, it’s likely that as many as one million workers have seen their salaries move into the six-figure range ‒ or are likely to within the next few years ‒ and therefore face the prospect of losing at least some of their Personal Allowance.
That’s an awful lot of people.
Making your money go further
While those earning £100,000 plus are obviously doing rather well for themselves, it doesn’t mean they are completely fancy-free when it comes to money, particularly if they are the sole breadwinner for their household.
As a result, it makes sense to consider ways for your money to go further and perhaps retain some of that Personal Allowance.
There are a couple of straightforward ways in which you can do this. The first is simply to pay more into your workplace pension.
These contributions come from your gross salary, so before your tax is calculated.
By upping your contributions, you can ensure that your net salary ends up below the Personal Allowance threshold, or at least at a low enough level that you retain some of the Personal Allowance.
Obviously, the downside here is that you won’t be able to get your hands on the money until you retire. However, you rarely meet an older person who wished they had saved left for their retirement, so that’s unlikely to be a bad thing in the long run.
Along similar lines, many employers offer salary sacrifice schemes.
These allow you to sacrifice some of your pre-tax earnings to pay for something else.
Most commonly this will be pension contributions, but there may be other options, like travel schemes, childcare vouchers or even additional holiday allowances.