Taxpayers are urged to check if they’re paying more to HMRC than necessary, as the number of workers paying the top rate of income tax is set to exceed one million for the first time this year.
Wages inflation combined with frozen thresholds has resulted in the number of people paying the 45 percent additional rate tax on their earnings more than doubling to over 520,000 since 2021.
According to the latest data published by HM Revenue and Customs, the number of people paying 40 percent higher rate tax on their earnings is also expected to grow significantly to 6.31 million people in 2024/25, up from 4.43 million in 2021/22.
Dean Butler, managing director for Retail Direct at Standard Life commented: “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.”
“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.”
However, Mr Butler noted: “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.”
Claim back extra tax relief on pension payments
UK taxpayers get tax relief on their pension payments based on their income tax rate, with most getting a 20 percent top-up from the Government.
Mr Butler said: “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 percent tax on your pension contributions, for a total of 40 percent tax relief and a claim can be backdated for the last four tax years. Additional rate taxpayers can reclaim an extra 25 percent.”
However, Mr Butler warned: “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 tax-free personal allowances
A person’s ‘personal allowance’ is the amount of income they don’t have to pay tax on, and it’s set at £12,570 for the 2023/24 tax year.
When taxable income is more than £100,000, a person’s personal allowance is reduced by £1 for every £2 above this amount, and if their income is £125,140 or more then they lose this allowance altogether.
However, Mr Butler suggested: “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 a pension to keep more child benefit
The High-Income Child Benefit Charge rules changed earlier this year, with child benefit now reducing if a person or their partner earns over £60,000 instead of £50,000. Parents will only lose it entirely if one earns more than £80,000.
Mr Butler said: “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.”
Salary sacrifice options
Some workplace pension schemes offer the option of salary sacrifice (or salary exchange).
Explaining the initiative, Mr Bulter said: “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.”
However, Mr Bulter noted: “Mortgage applications can be affected, as your official salary appears lower, so it may not be an appropriate step for everyone.”
