Dean Butler, Managing Director for Retail Direct at Standard Life comments: “Having to pay more tax is one way to dampen the excitement of a pay increase, and the disappointment can be compounded further if you are pushed into the next tax band and become a higher rate taxpayer in the process. Indeed, the latest estimates from HMRC show that the number of people in the UK paying the top rate of income tax of 45 per cent is set to pass 1 million for the first time this year, while the number of higher rate taxpayers — who pay tax at 40 per cent on earnings – is expected to grow significantly to 6.31 million people in 2024-25, up from 4.43 million in 2021-22.
“With an increasing number of people liable to pay higher tax rates on their earnings and no changes expected to any of the allowances or thresholds until April 2028, more people will themselves in higher tax bands as the buffer between wages and tax band thresholds close – known as fiscal drag. Being aware of the allowances and reliefs that allow you to keep more of your hard-earned money is a must. One way to do this is by putting more into your pension, protecting more of your income, while also saving for your future.”
Dean Butler’s outlines actions for higher rate tax payers to consider taking:
Claim back extra tax-relief on pension payments – “UK taxpayers get tax-relief on their own pension payments based on the rate of income tax they pay, with most getting a 20% top-up from the government. This means it’ll only cost you £80 to pay £100 into your pension. If you are a higher-rate taxpayer, you can reclaim an extra 20% tax on your pension contributions, for a total of 40% tax relief and a claim can be backdated for the last four tax years. Additional rate taxpayers can reclaim an extra 25%.
“However, many higher rate taxpayers don’t realise that this relief isn’t applied automatically – you have to claim it. Depending on how your payments are being made, you may need to complete a self-assessment tax return, and you’ll then either get the tax back as a rebate at the end of the tax year or through an adjustment to your tax code. You can claim back any tax relief for the last four tax years only.
Recover your tax-free personal allowance – “Your ‘personal allowance’ is the amount of income you don’t have to pay tax on, and it’s set at £12,570 for the 2023/24 tax year. When your taxable income is more than £100,000, your personal allowance is reduced by £1 for every £2 above this amount, and if your income is £125,140 or more then you lose this allowance altogether. However, by paying into a pension plan instead you can reduce your adjusted net income, helping you recover some or all of your personal allowance, depending on how much you put in.
Pay more into your pension to keep more of your child benefit– “Earlier this year, the High-Income Child Benefit Charge rules changed with child benefit now reducing if you or your partner earn over £60,000, while you’ll lose it entirely if one of you earns more than £80,000. Higher earners could consider paying more into a pension plan to reduce your adjusted net income – if you manage to reduce this income to below £80,000, you could get some or all of your child benefit back, while also putting more money away for your future.
Check out salary sacrifice options – “Some workplace pension schemes offer the option of salary sacrifice (or salary exchange). This involves agreeing to reduce your salary by a certain amount, which is then contributed directly to your pension. This reduction in salary results in lower national insurance contributions and income tax, so can be an effective way of keeping more of your income whilst also saving more for retirement. It’s important to note, however, that mortgage applications can be affected, as your official salary appears lower, so it may not be an appropriate step for everyone.”
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