The Abatement Dilemma

You may have to pay more income tax if your annual income exceeds £100,000 as a result of the abatement of the annual personal allowance. The allowance is gradually reduced until it is eliminated in full.

The annual personal allowance is:

2018/19 – 11,850
2019/20 – 12,500
2020/21 – 12,500

Once your “adjusted net income” exceeds £100,000 your personal allowance is reduced by £1 for every £2 of income over and above £100,000.

For example

If in 2019/20 you have income of £120,000 and make (gross) pension contributions of £5,000 then your adjusted net income is £115,000.

It’s over the £100,000 limit and so the annual personal allowance is reduced. The £12,500 is reduced by £1 for every £2 by which your income exceeds £100,000.

The reduction in the personal allowance is therefore £7,500 (half of (£115,000 minus £100,000)).

The personal allowance for 2019/20 becomes £5,000.

The 60% tax zone

When your net income falls within the zone in which the personal allowance is reduced (that’s from £100,000 to £125,000) then the marginal rate of tax is 60%. This is the combined effect of the application of the higher rate of tax and the reduction in the personal allowance. Currently for 2019/20 the upper end of the band is £125,000 but that may not be true for other years, the strict upper limit is £100,000 plus twice the personal allowance.

Stealth Tax

Abatement was introduced on 6 Apr 2010 when the threshold was set at 100,000. Almost every year the annual person allowance goes up and tax rate bands are adjusted. However, the abatement threshold has never changed. This means that over time more people are becoming liable to 60% tax. If your employment or self employment income is over 100,000 then there is  National Insurance at 2% as well. Don’t let anybody tell you that the highest rate of tax in the UK is 40%, it’s 62%.

Options

There are three options, none of which is easy:

1. Pay the tax
2. Reduce your income below £100,000
3. Increase your income so much that a mere 60% on a 25,000 tranche of your income pales into insignificance.

Don’t dismiss that last one. All you need is a plan. What does your business plan say?

Covid-19 Bounce Back Loans

From 4 May 2020 a number of UK banks are taking part in the government sponsored Bounce Back Loan Scheme (BBLS). This is the name given to the policy announced by Rishi Sunak on 27 Apr 2020 whereby small loans to qualifying businesses are subject to simpler rules than the Coronavirus Business Interruption Loan Scheme (CBILS) and these BBLs are underwritten 100% by the government.

1 of 3 Covid-19 Measures in General
2 of 3 Covid-19 Support For Freelancers
3 of 3 Covid-19 Bounce Back Loans

You cannot apply for a BBL if:

  • You’re already claiming under CBILS; or if
  • Your business was an “undertaking in difficulty” as at 31 December 2019.

In short:

  • There is no cap on turnover for a micro business applying for a BBL;
  • Loans will be from £2,000 up to 25 per cent of a business’ turnover or £50,000, whichever is the lower;
  • Banks will no longer require forward financials or business plans;
  • You should have access to the funds within days;
  • Loans will be interest free for the first 12 months; and
  • Thereafter the annual rate of interest is capped at 2.5%.

The loans will be easy to apply for through a short, standardised online application, and you will be required to self-certify that you are eligible for a Bounce Back Loan.

The government announcement is here.

A list of participating banks is here and that page will also lead you to a summary page about your bank which leads you to the start of loan application.

Apply directly to your bank. This is a Government initiative and not an HMRC initiative. Consequently, Proactive can not apply on your behalf.