Dean Butler, Managing Director for Retail Direct at Standard Life comments: “Pay rises are great, and a lot of people get them this time of year. However, those whose pay increase lifts their income above £50,271 (or £43,663 in Scotland) may find themselves brought back down to earth upon realising they’ve been pushed into a higher rate tax bracket and are therefore required to pay 40% tax (42% in Scotland) on earnings above this threshold. With tax bands frozen until 2028 and wages rising, the number of UK taxpayers subject to higher rate income tax is estimated to have risen by 30% since the 2021-22 tax year – reaching 6.31 million in the 2024-25 tax year, up from 4.43 million in 2021-22.
“The next three years will see more and more people enter the higher rate tax brackets, unless the freeze on extending tax brackets is lifted. While a higher tax rate inevitably impacts the money you take home, there are several reliefs and allowances available that can work in your favour and help you maximise your income. Pension saving is a particularly good way to protect your income by reducing your tax bill, while also allowing you to save for the future.”
Dean Butler outlines his top tips for higher rate taxpayers looking to protect their income:
Claim extra pension tax relief – “UK taxpayers are entitled to 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 only costs £80 to pay £100 into your pension. Higher-rate taxpayers can reclaim an extra 20% tax on pension contributions for a total of 40% tax relief, while additional rate taxpayers are entitled to an extra 25%. However, higher rate relief doesn’t always happen automatically – you might have to claim it. Depending on how you make your payments, you may need to complete a self-assessment tax return. You’ll then either get the tax back as a rebate at the end of the year or through an adjustment to your tax code. Tax relief can only be claimed back for the last four tax years.
Paying into your pension to recover your tax-free personal allowance – “Your ‘personal allowance’ is the amount of income you don’t have to pay tax on. This is set at £12,570 for the 2024/25 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 you lose this allowance altogether. However, paying into a pension plan can offer a solution to this, allowing you to reduce your adjusted net income, helping you recover some or all of your personal allowance, depending on how much you put in.
Increase your pension contributions to keep more of your child benefit – “As of April 2024, families with an income of £60,000 or over are subject to the high-income Child Benefit tax charge. This means a reduction in the amount of Child Benefit available, with the charge standing at 1% of your Child Benefit for every £200 of income between £60,000 and £80,000. By the time you or your partner earn more than £80,000 you lose your Child Benefit with the charge equalling your full amount of child benefit. Higher earners could consider increasing pension contributions to reduce your adjusted net income – by reducing this income to below £80,000, you could get some or all of your child benefit back, while also saving for your future.
Consider salary sacrifice – “Some workplace pension schemes offer salary sacrifice (or salary exchange). This means agreeing to reduce your salary by a certain amount, in exchange for a pension contribution made by your employer. With this reduction in salary resulting in lower National Insurance (NI) contributions and income tax, it can be an effective way of keeping more of your income whilst also saving more for retirement. It’s important to note, however, that salary sacrifice can impact mortgage applications and payments based on your salary like Statutory Maternity pay, so it might not be right for everyone.”
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