The magic number – £42,475

Author: Russell Smith
July 4, 2012

If the meaning of life is 42, the magic number in tax planning is £42,475.

£42,475 is the amount you can earn up to before you get into the higher rate.  If you earn less than this now you are in the basic rate which is 20% income tax, go above and you are paying 40% higher rate tax.  Simple eh?  Tax never is, here are a few more points.

1. This may sound obvious but you are only taxed at the higher rate on the amount above £42,475, not all of it

2. 20% income tax AND national insurance (class 1 for employees, class 2 and 4 for self employed)

3. If you are a director and drawing dividends, your dividends are 0% in the basic rate (up to £42,475) although they have already suffered corporation tax at 20%, and 25% in the higher rate.

4. Again, if you are a director and are drawing dividends, you have to gross up your dividends to arrive at your total income figure i.e. add on 10%.  This 10% is only for the purpose of the calculation.

5. If point 4 didn’t make any sense whatsoever, here’s the basics – the most tax efficient you can pay yourself as a director is £7,592 as a salary and £31,395 as net dividends (you then gross these up to £34,883, add on your salary to get to the magic £42,475).

6. If you just go over the £42,475, make sure you pay your pension contributions and then you can reduce your income back down under £42,475 and save you higher rate tax.

7. Same with gifts to charity.  Many people forget to put this down on their tax return but it could save you higher rate tax.

Whilst the personal allowance went up to £8,105 this year, the higher rate band of £42,475 remained the same putting thousands of people into the higher rate band for the first time.  So if you want to get out of it, send me an email: russell@rsaccountancy.co.uk.

 

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