Self-Assessment

UK nationals and tax residents are entitled to a Personal Allowance – in the 2024/25 tax year this amount is £12,570  - this is the first amount of your income earnt in a year upon which no tax is paid. For every £2 above a yearly income of £100,000, then the personal allowance starts to decrease by £1. So effectively this means once you start earning above £125,140, your personal allowance is completely eroded. This actually equates to a 60% equivalent tax rate on your income above the £100,00 threshold.

What can you do to avoid this punitive 60% tax rate ?

Reduce your total income below the £100,000 threhsold by:

• Offsetting allowable expenses against that income
• You can increase your own pension contributions into an employer’s pension scheme – these pension contributions are taken off your total income
• Offset allowable business losses (many airline pilots have second income sources and other businesses). If these businesses are making a net loss then these can be offset against your total income from flying
• Any gift to charity (not GIFT AID which is different) can be offset against your income

If your income is still above the £100,000 threshold then you can consider making contributions to your own personal pension or self invested personal pension or make gift aid contributions – these are deducted from your total income to give an adjusted net income figure and if this is below £100,000 then you are entitled to the full Personal Allowance. Any Personal pension and gift aid contributions will also increase your tax bands by the same amount – for example if you made a gross pension contribution of £10,000 (i.e. £8000 you and £2000 tax relief from government), then the tax rate bands would increase by same amount – so £10,000 of income that was being taxed at 40% if you are a higher rate taxpayer, is now being taxed at the lower rate i.e. 20% - this may mean if HMRC were not expecting this and had not incorporated it into your tax code then you may be entitled to a tax refund or your tax code will increase next year.

It can be difficult to work out manually how much you need to make as a personal pension contribution or make additional contributions into your employer scheme – sometimes you can miscalculate and put too much into the pension – you cannot get this money back until minimum pension age currently 55, soon to increase until 57, unless you are terminally ill with 12 months life expectancy – you might need it for something else important right now – or you might not put in enough and so your income will still be above the £100,000 and next year you will lose some of your personal allowance and pay more tax (HMRC will lower your tax code or ask you to pay the outstanding tax) when actually you could have afforded to make that pension contribution, and preserved that personal allowance.

Get in touch and we can work out together what you need to make as a pension contribution which must be made BEFORE the end of the tax year i.e. April 5th.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is generally dependent on individual circumstances.