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The personal allowance is the income you can earn each year before paying income tax. The standard personal allowance for the 2022/23 tax year is £12,570. You don’t have to pay any income tax if your income is below this threshold.
However, the personal allowance starts to be withdrawn once your adjusted net income exceeds £100,000. This is known as the phased withdrawal of the personal allowance. The personal allowance is reduced by £1 for every £2 that your income exceeds £100,000. This means that once your income reaches £125,140 or more, your personal allowance will be reduced to zero.
So how does the phased withdrawal work in practice? Here are some examples:
- Jane has an adjusted net income of £105,000 for the 2022/23 tax year. Her personal allowance is reduced by £2,500 (£105,000 – £100,000 = £5,000. £5,000 / 2 = £2,500). Jane’s allowance is £10,070 (£12,570 standard allowance – £2,500 reduction).
- Mark has an income of £130,000. His personal allowance is reduced by the full £12,570, so he has no personal allowance.
- Nina has an income of £140,000. Her personal allowance is also reduced to zero, even though her income is higher than Mark’s. Once your income reaches £125,140, you will have no personal allowance.
Some key points about the phased withdrawal of the personal allowance:
- It applies across the UK – for English, Welsh, Scottish and Northern Irish income tax.
- The £100,000 threshold has been fixed since the 2010/11 tax year. Previously, the allowance started to withdraw at £100,000.
- The adjusted net income calculation includes all taxable income before deducting personal allowances, including employment income, pensions, business income, interest and dividends.
- Certain allowable deductions like Gift Aid and pension contributions can reduce adjusted net income for the personal allowance calculation.
- The personal allowance is withdrawn irrespective of your actual taxable income. Your taxable income is your adjusted net income minus your personal allowance. Even if your taxable income exceeds £100,000, your allowance can still be reduced if your adjusted net income exceeds £100,000.
- The phased withdrawal only applies to the standard personal allowance. It does not affect other allowances like the Marriage Allowance or Blind Person’s Allowance.
- Phased withdrawal can effectively add up to 60% to your marginal tax rate once the allowance reaches zero. This creates a very high effective tax rate zone between £100,000 and £125,140.
- There is no upper limit on income for phasing out the personal allowance – it reaches zero once income hits £125,140 and stays at zero no matter how high the income.
In summary, the phased withdrawal of the personal allowance ensures that higher earners get less personal allowance than basic-rate taxpayers. This makes sure that higher earners pay more tax overall. The phasing out starts at £100,000 and is completely extinguished at £125,140, creating a band of high marginal effective tax rates for those with incomes in this range.
Contact our specialist tax advisors for tax planning and more information on Higher Earners Personal Allowance.