In April this year, the government introduced significant changes to income tax rates, allowing millions of UK taxpayers to keep more of their hard-earned cash. And, in 2018, the average taxpayer is shelling out approximately £1,000 less in tax than they were six or seven years ago. However, once you move into the higher-rate tax band it’s a different story, and getting a little extra in your pay packet could mean missing out on a whole host of valuable tax breaks.
Higher-Rate Taxpayers (£46,350 - £150,000)
Under current legislation, any money you earn over £46,350 is taxable at a rate of 40%, and once you creep over this threshold you’ll face a series of expensive tax hikes. Here are some of the issues you’ll encounter as a higher-rate taxpayer:
- Your personal savings allowance will be cut in half, falling from £1,000 to £500.
- You’ll pay twice as much capital gains tax – 20% on any earnings over £11,700, compared to just 10% for a basic-rate taxpayer.
- Tax on any dividends you accrue over the £2,000 allowance will rise from 7.5% to a whopping 32.5% once you hit the higher-rate tax bracket.
- If you’re married or in a civil partnership you’ll lose your £238 ‘marriage allowance’ if you or your partner move into the higher-rate tax band.
- If you’re a parent, you’ll lose 1% of your child benefit for every £100 you earn above £50,000.
- And, for every £2 you earn over £100,000 you’ll lose £1 of your personal tax-free allowance, exhausting it entirely by the time you reach £123,700.
If you’re earning more than £46,350 a year, you’re missing out on a number of valuable tax breaks, and, to make sure you’re not paying out too much or too little, it’s a good idea to seek some professional advice. An experienced tax adviser
can help you streamline your personal finances, identify any potential money-saving opportunities and ensure you don’t pay a penny more in tax than you need to.
Additional-Rate Taxpayers (£150,000 plus)
For the top 1% of UK earners, tax legislation is even more punitive, and anyone with an annual income in excess of £150,000 is likely to feel the pinch. Here are some of the issues facing our top earners:
- Any income over £150,000 is taxed at the additional rate of 45%.
- Additional-rate taxpayers lose their entire personal savings allowance.
- Tax on dividends increases from 32.5% to 38.1%.
- Individuals earning over £150,000 will see significant cuts to the amount they’re allowed to pay into their personal pension each year.
How Can I Keep My Tax Bill in Check?
If you fall into the higher-rate or additional-rate income tax bands, there are a few things you can do to protect your money and keep the taxman at bay:
- Get an ISA: You can pay up to £20,000 a year into an ISA without incurring any capital gains tax, dividend tax or income tax. Plus, any interest you accrue from your ISA is completely tax-free.
- Trim your salary: Some employers will allow their staff to shave a chunk off their take-home pay in exchange for other benefits, such as pensions and childcare. This could help you move back into the basic-rate band and reclaim all the inherent tax breaks.
- Increase your pension: Higher-rate taxpayers receive 40% tax relief on pension contributions, compared to just 20% for basic-rate taxpayers. So, if you don’t mind tying up a portion of your income, paying a little extra into your pension fund could help to reduce your tax bill.
By far the best way to manage your tax affairs is to consult a professional, so, if you want to maximise your earning potential and stay up to date with all the latest tax legislation, you need to speak to a specialist adviser