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Jam
today, or Jam tomorrow?
Income is "cut up" into fiscal years to decide whether you are a higher rate taxpayer or not. Someone who goes over the limit one year and has nothing the next pays much more tax than someone with a steady, level income.
This table uses the current tax rates to illustrate the point.
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Year 1
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Year 2
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Total
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Salary
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£70,000
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£0
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£70,000
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Income tax (ignoring
NIC)
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£22,925
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£0
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£22,925
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Salary
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£35,000
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£35,000
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£70,000
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Income tax (ignoring
NIC)
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£8,596
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£8,596
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£17,192
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That is a difference of about 33% in the tax payable. If the individual has savings income rather than profit, the figures change slightly, but the difference is still as dramatic.
If your income might fluctuate like this, it is worth looking at ways to advance or delay the charge on that income in order to even out the tax rates.
Of course, if the tax charge is going to be the same in either year, then most people would rather pay the tax later - if you receive some types of income on 6 April rather than 5 April, you may pay the tax on it a whole year later.
Income that can be moved from year to year easily includes:
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salary (although PAYE means that the payment of the tax cannot be delayed for a whole year);
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dividends from family companies;
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distributions from discretionary trusts;
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tax charges on cashing in some life insurance policies.
It is also possible to claim reliefs for some types of payment in particular years to make sure that they reduce income taxable at the highest rate. These include pension contributions and charitable donations.
| Action Point! |
| Consider Moving Income Or Reliefs Around 5 April |
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