Loss of Personal Allowance

The Loss of Personal Allowance is a tax rule that reduces your tax-free personal allowance when your income exceeds certain thresholds. Understanding this can help you plan your finances and avoid unexpected tax bills.

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How the Loss of Personal Allowance Works

HMRC reduces your personal allowance by £1 for every £2 your adjusted net income exceeds £100,000. Your personal allowance is the amount you can earn tax-free each year.

If your income is high enough, you can lose your entire personal allowance. This effectively increases your tax rate on income above the threshold.

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Who is Affected and Key Details

The loss applies to individuals with adjusted net income over £100,000. Adjusted net income includes total income minus certain deductions like pension contributions.

Threshold starts at £100,000 for the 2023/24 tax year and is adjusted annually.
For every £2 above £100,000, you lose £1 of your personal allowance until it reaches zero at £125,140.
This affects employees, self-employed individuals, and company directors with high earnings.
Pension contributions can reduce your adjusted net income and help retain your allowance.
Charitable donations through Gift Aid also lower your adjusted net income.
Marriage allowance transfers are impacted if you lose your personal allowance.
Child benefit tax charge interacts with this loss for incomes over £50,000.
If you have multiple income sources, total them to check if you exceed the threshold.
Loss is calculated annually based on your Self Assessment or PAYE tax code.
Planning ahead with salary sacrifices or investments can mitigate the impact.

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Common Mistakes and Getting It Right

A common mistake is not including all income sources when calculating adjusted net income. Bonuses, dividends, and rental income all count towards the threshold.

Keep accurate records and consider professional advice if your income nears £100,000. Proactive planning can save you significant tax and avoid surprises.

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