England & Wales only – Scotland sets its own tax rates and bands!
Following the mini-budget in November 2022 the Government has introduced what we would call “stealth-taxes” and “tax-traps” designed to allow them to announce that there are no major tax rises whilst dragging more and more people into either paying tax or higher rates of tax over the next 5 years or so. So, what should you be aware of and what do you need to check?
Firstly, the freezing of personal tax allowances.
- The amount that anyone can earn tax free is to be frozen at £12,570 until 2028.
Effect. If you are a low earner perhaps because of part-time work or pension income for example, as you get pay rises in the next few years – if your income gets above £12,570 then you start paying tax and National Insurance.
- Basic rate tax bracket (£12,571 to £50,270) has been frozen until 2028.
Effect: If you are just below the higher rate tax bracket (£50,270), again with pay rises over the next 5 years or so then you are likely to find yourself paying higher rate tax at 40%. Remember also, if this was to affect you then you will also become subject to what we call the “child benefit tax-trap”! More information here: https://financialfortress.co.uk/child-benefit-tax-trap/
- Loss of child benefit where total income is between £50,000 and £60,000. (TAX TRAP!)
Effect: Where any person in a household earns more than £50,000 and someone else (in the household) received child benefit then it will need to be repaid at the rate of 1% of child benefit received for every £100 you earn over £50,000. Therefore, if you earn over £60,000 you will need to repay back all your child benefit!
- Income over £100,000 and the reduction in your personal allowance. (TAX TRAP!)
Effect: If your income is over £100,000 per year (or gets there between now and 2028 through pay-rises) then you will begin to lose your personal allowance (the amount you can earn tax-free, ie: £12,570). Your personal allowance is reduced (taken away) by £1 for every £2 your income is over £100,000. Meaning if you are lucky enough to earn £125,140 then you also now have no personal allowance atall! This equates to a 60% rate of tax!
- Income over £125,140 – now paying additional rate tax (45%)
Effect: In the past you needed to earn over £150,000 to pay the additional rate of tax, however this has now been brought down to £125,140. Therefore more people will be dragged into paying 45% tax on income rather than the 40% rate.
- National insurance rates remain frozen until 2028.
Effect: See points 1 and 2. More lower earners will start to pay national insurance sooner as their income rise through pay reviews.
So, what do you need to consider in order to reduce and limit the effect on you?
- Pay into a pension. Basically, paying into a pension reduces how much of your money is exposed to tax liability. Careful use of pension contributions can alter your tax levels (for example taking you from a higher rate tax bracket to the basic rate bracket) as well as allowing you to reclaim either your personal allowance or child benefit.
- Check to see if you can make pension contributions (or childcare payments) through what we call “salary sacrifice”. More detail here: https://financialfortress.co.uk/salary-sacrifice-pensions/
- Ensure any charitable donations are recorded and added to your tax return. Remember, donations to charity are tax-free and either you or the charity can reclaim the tax!
- Check to see what additional allowances may be available to you and your family. For example: Married couples tax allowance, reclaiming overpaid tax elsewhere (for example on lump sum withdrawals form a pension or overseas income) .
- Additional tax benefits may be available? Through work, for example transport costs, childcare vouchers or switching to a low emissions car.
- Make the most of your personal savings and ISA allowances to maximise the amount of savings that doesn’t pay tax.
- Maximise your tax-deductible expenses. For example, travel expenses or uniforms and clothing allowances. Have you been working from home? Claiming further allowances if so.
- Look at other tax vehicles such as Venture Capital Trusts (VCT’s) or Enterprise Investment Schemes (EIS)