The basic personal allowance is reduced where a person has ‘net adjusted income’ in excess of £100,000. The personal allowance (£10,000 for 2014/15) is reduced by £1 for every £2 by which this limit is exceeded until the allowance is fully abated.
This means that anyone with income of more than £120,000 in 2014/15 loses all their personal allowance.
However, it is possible to preserve entitlement to the personal allowance by reducing income to below £100,000. There are various ways in which this can be achieved, for example by transferring income producing assets to a spouse or civil partner where his or her income is below £100,000.
Likewise, adjusted net income can be reduced by making pension contributions, which is in itself beneficial due to the higher rate relief that they receive on contributions up to the available annual allowance. Charitable donations would also work (although the donor would lose the benefit of the donation).
Julie has adjusted net income of £125,000 for 2014/15, of which £30,000 is in the form of interest from investments. Her husband has income of £10,000 for the year.
As Julie has income for 2014/15 in excess of £120,000, she will lose all the personal allowance for that year. By transferring the investments to her husband, her income is reduced to £95,000 and she retains the personal allowance.
For a higher rate taxpayer paying tax at 40% the saving is even greater