Preserving Your Personal Allowance: Tips for Reducing Your Tax Liability

The personal allowance for 2023/24 is set at £12,570, but not everyone can benefit from it. A taper applies when adjusted net income exceeds £100,000, reducing the personal allowance by £1 for every £2 by which adjusted net income exceeds £100,000. The personal allowance is lost entirely when adjusted net income reaches £125,140.

The combined impact of the personal allowance taper and the higher rate of tax (at 40%) applying in this band means the marginal rate of tax between £100,000 and £125,140 is 60%. It drops to 45% once income reaches £125,140. When National Insurance contributions, pension contributions, and student and post-graduate loans are taken into account, the marginal rate of deduction in this zone can climb to 80%.

Here are some steps that can be taken to preserve the personal allowance where income falls in the abatement zone:

Option 1 – Timing: Consider deferring income so that it's received in 2024/25 instead. This may reduce income in 2023/24 such that either the personal allowance is preserved or less of it is lost, without triggering the taper in 2024/25.

Option 2 – Pension contributions: Making pension contributions can be tax-efficient and help build up retirement funds. Making a pension contribution of £30,000 to reduce adjusted net income from £130,000 to £100,000 will recover the personal allowance in full and attract tax relief.

Option 3 – Donations to charity: Individuals who want to make charitable donations can take advantage of the gift aid rules to make charitable gifts while reducing their adjusted net income and preserving their personal allowance.

By taking advantage of these options, you can preserve your personal allowance and reduce your tax liability.