1. Marriage allowance: lost if recipient becomes a higher rate taxpayer.
2. High income child benefit: lost at £60,000 income. The benefit is reduced by 1 per cent per £100 if one parent earns in excess of £50,000. Where income is greater than £60,000 a 100 per cent charge applies, cancelling out the benefit completely.
In this situation, some people choose not to apply for child benefit. However, by claiming, even if not taking any payments, the recipient will receive national insurance credits to protect state pension entitlement.
In his 2024 Spring Budget, chancellor Jeremy Hunt announced "immediate support for working families" would be given by increasing the threshold to £60,000 effectively halving the rate at which child benefit is repaid, and that the child benefit taper would be increased from £60,000 to £80,000.
He also announced a consultation to investigate whether to assess child benefit eligibility on household income, rather than on individual income with a view to implementing by April 2026.
3. Personal allowance: lost at £125,140. For every £2 received in earnings above £100,000, £1 of personal allowance is lost. The loss of the allowance effectively adds an extra 20 per cent of tax on income between £100,000 and £125,140.
Generous benefits in kind can also trigger this trap. For example, if you run a company car or receive medical insurance, they will be taxed as if they were salary.
In addition to the above, the tapered annual allowance and university maintenance loans are examples of additional ‘traps’ to be mindful of.
Tax trap planning considerations
- Maximise use of allowances and exemptions between spouse/civil partner to remain within tax thresholds and limits.
- Transfer (savings and investments) income between spouses/civil partner to maximise tax efficiency.
- Make increased pension contributions to extend basic rate tax band and potentially gain higher rates of pension relief at source.
- Be sure to apply for child benefit to get national insurance credits for state pension and consider how the changes from next tax year will affect clients.
Taxation of collective funds
One of the most common uses of the personal savings allowance and dividend allowance is when they are assessed against returns from collective funds.
Confusion can arise over how tax is applied if income is reinvested or distributed and whether the funds are income or accumulation vehicles.
Accumulating funds produce an income, even if not received by the client. The income goes to the fund manager and they decide how to invest it. A client’s consolidated tax certificate will show the client’s share of the fund’s income.
How funds are invested affects which allowances are impacted by interest or dividends received from the underlying investments.
It is all down to the equity content of the fund. If the fund has less than a 40 per cent equity content, it will be taxed on an interest basis – cash funds, fixed interest, distribution and some multi-asset funds may fall into this category.
Against this form of income you can use the starting rate band for savings or the personal savings allowance.
If the fund has an equity content greater than 40 per cent, it will be taxed on a dividend basis and the dividend allowance can be used.
