The Personal Allowance Cliff and a Stranded Trading Loss
Nadia is UK-resident and works full time as a marketing director. For 2024/25 she has salary of £118,000, a bonus of £30,000, UK rental profits of £9,000 (rents £21,000 less allowable expenses £12,000) and bank interest of £1,500. She made net personal pension contributions of £12,000 and net Gift Aid donations of £4,000. She also carries forward a £40,000 loss from a sole trade that ceased in 2021/22, and asks whether that loss can be set against her employment income to "protect her personal allowance". Nadia also believes her bank interest is tax-free "because interest is always tax-free for basic rate taxpayers".
1. Compute Nadia's adjusted net income and personal allowance for 2024/25, showing every step, and state the rate at which her bank interest is actually taxed.
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Step 1 – Total income
| Source | £ |
|---|---|
| Salary | 118,000 |
| Bonus | 30,000 |
| Property business profit (21,000 − 12,000) | 9,000 |
| Bank interest | 1,500 |
| Total income | 158,500 |
Step 2 – Convert reliefs to gross
- Pension: relief at source, so £12,000 net = £12,000 × 100/80 = £15,000 gross.
- Gift Aid: £4,000 net = £5,000 gross.
Step 3 – Adjusted net income (ANI)
ANI = 158,500 − 15,000 − 5,000 = £138,500
Step 4 – Personal allowance
PA = 12,570 − ½ × (138,500 − 100,000) = 12,570 − 19,250 → nil (the reduction cannot produce a negative allowance).
Note that even the £20,000 of gross reliefs already given have no effect on the allowance: the excess over £100,000 is £38,500 before reliefs and £38,500 after - the reduction exceeds the allowance many times over.
Step 5 – Rate on the interest
Her income exceeds £125,140, so she is an additional rate taxpayer. The personal savings allowance is nil at the additional rate (it is £500 at higher rate and £1,000 at basic rate). The £1,500 of interest is therefore taxed at 45%, giving £675 of tax.
2. Advise on the £40,000 carried-forward trading loss and on Nadia's belief that her bank interest is tax-free.
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The trading loss
- A loss carried forward under the trade loss provisions may be set only against profits of the same trade (ITA 2007 s.83). The trade ceased in 2021/22, so there are no future profits of that trade: the £40,000 is stranded permanently.
- It cannot be set against employment or property income; that would require a same-year or carry-back claim, which is no longer possible.
- Terminal loss relief is also unavailable: it applies only to losses made in the final 12 months of the trade, and this loss arose years before cessation. (For completeness, a terminal loss claim would in any event have had to be made within four years of the end of the tax year of cessation.)
- The practical lesson is that carried-forward trade losses are not a tool for managing the personal allowance taper.
The bank interest
The belief is wrong. Since 6 April 2016 savings interest has been taxable; what changed was the withdrawal of the 10% credit and the introduction of the personal savings allowance:
- basic rate: £1,000 allowance;
- higher rate: £500;
- additional rate: nil.
As Nadia's top rate is 45%, the whole £1,500 is taxable at 45%.
Her ANI is unaffected by the loss: ANI is reduced by gross pension contributions, gross Gift Aid, same-year trading losses and certain other reliefs - not by carried-forward losses of a ceased trade.
3. Nadia asks how much more she would have to pay into her personal pension to restore her full personal allowance, and whether it is worth doing. Advise with figures.
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The arithmetic
Full personal allowance requires ANI of £100,000 or less.
- Current ANI: £138,500
- Gross relief required: 138,500 − 100,000 = £38,500
- Net cash contribution: 38,500 × 80% = £30,800
Annual allowance check
- Threshold income = 158,500 − 15,000 (her own contributions) = £143,500, which is below £200,000, so there is no tapered annual allowance.
- Annual allowance £60,000, less £15,000 already used = £45,000 available. £38,500 fits, so no annual allowance charge.
Is it worth it?
- The contribution itself attracts relief at 45%: £38,500 × 45% = £17,325.
- Restoring the allowance is worth £12,570 × 45% ≈ £5,656.
So the allowance-restoration element adds only about £5,656 of value to a £30,800 cash outlay. The pension contribution has to stand on its own merits (retirement funding, inheritance tax, growth); it should not be driven by the allowance. A partial contribution would recover part of the allowance (any ANI between £100,000 and £112,570 gives some allowance), so if she does contribute, the marginal value falls away quickly above £112,570 of ANI.