Around 6.8 million taxpayers face being dragged into a higher tax bracket next year!
Are you likely to become one of them?
If your worried about joining the crowd, by following the tips from our local accountants in St Albans, and doing a bit of extra planning, even those earning over £100,000 won’t have to pay higher-rate tax.
Stubbornly high inflation and rising wages, combined with frozen tax-free allowances, mean 4.2 million people could become basic-rate taxpayers, who currently don’t pay tax, and 2.6 million could be dragged into the higher-rate tax band, according to calculations from the Centre for Economics and Business Research.
The amount the Government is due to raise in income tax this year is expected to soar. It’s estimated 55pc more people will hit the additional-rate income tax band, thanks to rising wages and the lowering of that threshold. The highest tax band dropped from £150,000 to £125,140 in April 2023.
Further findings show that since tax bands were first frozen in 2021 there has been a 142pc increase in the number of individuals paying additional-rate income tax at 45pc.
With this in mind, it’s worth making sure you’re using every tax rule to your full advantage to cut your income tax bill and shield more of your hard-earned cash from the taxman.
Before we get into the nitty-gritty of our accountants’ Tips to avoid Higher Rate Tax, it is always worth speaking to a qualified and informed accountant. If you are unsure about how best to account for tax and mitigate against higher tax payments, consulting a professional accountant can provide valuable guidance.
What are the current income tax rates and bands?
In 2023-24, the personal income tax bands and rates in most of the UK are as follows:
Income tax in England, Northern Ireland and Wales:
| Tax Band | Income | Tax Rate (pc) |
| Basic Rate | £12,571 to £50,270 | 20 |
| Higher Rate | £50,271 to 125,140 | 40 |
| Additional Rate | Over £125,140 | 45 |
These are the rates you pay in each band if you have a standard personal allowance of £12,570. The personal allowance decreases by £1 for every £2 you earn over £100,000, meaning that those who earn £125,140 or more do not receive a tax-free personal allowance.
How to cut your income tax bill
1. Make pension contributions
The Government pays tax relief on money you save into a personal or workplace pension, up to £60,000 a year, therefore reducing how much income tax you pay.
As long as you can afford to spare the money each month, paying into a pension can cut your tax bill, and often keep you below crucial allowances so you still get lucrative tax breaks.
Most people can pay £60,000 into a pension each year, as long as it’s not more than 100pc of their earnings. In theory, this means someone earning £110,000 could reduce their taxable income to £50,000 by squirrelling away the maximum £60,000 into their pension.
If you really want to max out your pension, you could use a little-known rule called ‘carry forward’ to add more to your pension by using previous years’ unused allowances. You can go back up to three tax years and use up any remaining allowance going spare.
2. Claim marriage allowance
This tax break can save married couples, or those in a civil partnership, up to £252 a year in income tax.
This allowance is available if one partner earns less than the tax-free personal allowance of £12,570, and the other is a basic-rate taxpayer, earning less than £50,270. It’s ideal for those couples where one person doesn’t work, or works part-time.
The lower earner can transfer £1,260 of their unused tax-free allowance to the higher-earning half of the couple, to boost their take-home pay. However, if the non-taxpayer earns more than £11,310 they may end up having to pay tax, as their income will exceed their new, lower tax-free allowance.
It’s worth noting you can also backdate any claims for up to four years, as long as you were eligible during this time. You’ll be refunded the tax you overpaid, meaning you can claim back up to £1,256 in total.
3. Give money to charity
Donating to a good cause can benefit those in need, while reducing your tax bill. Admittedly, this requires you to have the spare cash to give away in the first place, but once you factor in the income tax you’ll save via Gift Aid, it will cost you less than you think.
Say, for example, you donate £100, the charity will get £25 back through tax relief. Then a higher-rate taxpayer can get back 20pc of the £125, which equals £25.
This effectively works by increasing your basic-rate band by the amount you donate.
So, if you donate £1,000, your basic-rate tax threshold will increase from £50,270 to £51,270 in the current tax year.
Through the Gift Aid scheme, higher and additional-rate taxpayers can claim tax back on any donation. They just need to give the details in their self-assessment tax return.
Higher-rate taxpayers can claim back 20pc relief on the full amount given, while additional-rate taxpayers can claim back 25pc. This is on top of the basic-rate tax relief the charity receives.
4. Take advantage of salary sacrifice schemes
Check if your employer offers a salary sacrifice arrangement for paying into a pension. This is where you agree to a salary cut, or waive a bonus, in favour of a pension contribution instead. By doing this, it’s possible for those earning just above a tax threshold to drop a tax income band.
This can also be beneficial if you have capital gains tax or dividend tax to pay, for example, as the tax rates depend on your income tax band.
Note that such schemes are not just for pensions. In fact, they are far more common for a range of benefits, such as cycle-to-work schemes, travel card loans or even buying electric vehicles.
As you pay for the product or service from your gross pay, you are saving by not paying income tax and National Insurance.
However, before you sign up to one of these schemes, make sure to go in with your eyes open; there are downsides to reducing your salary, such as decreased mortgage affordability.
You also need to be sure you can afford to give up the salary in return for the perk.
5. Check your tax code
Employed workers and pensioners who pay tax via Pay As You Earn (PAYE) will have a tax code on their payslip or pension statement indicating how much pay you receive before tax kicks in. It’s always sensible to ensure this code is correct, particularly if your circumstances have changed recently – such as getting a new job.
The most common tax code is currently 1257L. This is used for most people who have one job or pension, and means you are entitled to the full personal allowance of £12,570.
If yours is different, make sure you understand why. It’s vital to ensure you’re not paying too much tax. Remember it’s your responsibility to ensure your code is right.
You might have a higher or lower number if you’re paying or being repaid tax via your tax code, and there’s a host of different tax code letters indicating different circumstances.
Not sure where to find your tax code? Give our Payroll team a call on 01727 730550 and they will point you in the right direction.
6. See if you can claim tax relief for working from home
Employed workers can claim tax relief for working from home, as long as you have no choice but to work from home and your employer does not reimburse you for expenses you incur by doing so.
You can either claim a flat-rate of tax relief on £6 a week, and what you’ll get depends on your income tax band; basic-rate taxpayers get £62.40 for the year, while those who pay higher-rate tax get £124.80.
If you want to claim more, you’ll need to detail and provide evidence of your outgoings. These can only be for things that are solely used for work purposes that you wouldn’t pay if you were working in an office, such as extra heating.
If you’re self-employed, you can detail working from home expenses on your tax return, which will be set against your profits and therefore reduce your tax liability.
7. Make the most of ISAs
All forms of income contribute to the amount of income tax you pay, as they are essentially added together to determine your tax band. This includes income from savings interest, dividend payments and capital gains – but using Isas can help reduce the taxable income on all of these.
In the current high interest-rate environment, you may be getting more savings interest. Dividends from investments held outside pensions and Isas count towards your total annual income, so make sure investments are held in ISAs.
The key is to use up your allowances. You have an ISA allowance of £20,000 a year, and so does your partner. Remember, this is on a “use it or lose it” basis.
There are four different types of ISA: cash ISA, stocks and shares ISA, innovative finance ISAs, Lifetime ISAs.
In the Autumn Statement the Chancellor changed the rules so that, from April 2024 onwards, savers will be able to open more than one of the same type of ISA.
8. Share capital gains tax
The capital gains tax allowance was halved from £6,000 to £3,000 from April this year.
If you’re married, or in a civil partnership, you can reduce your liability by transferring assets to your partner and effectively pooling your CGT allowances. This way, you can collectively benefit from a £6,000 tax-free allowance. Transfers between spouses are tax-free.
For example, if a higher rate taxpayer sold a £50,000 portfolio and cashed in a £15,000 gain, then they would owe £2,400 in capital gains tax this year.
However, if they transferred a portion of the portfolio yielding a £3,000 gain to their legal partner, then the tax owed on the remaining £12,000 would be £1,800.
If your spouse earns less than £50,270, then you could also potentially benefit from their lower tax rates of 10%, instead of 20%, on the gains.
By reducing your taxable capital gains, you’ll also be reducing your overall amount of income, which could mean you’re less likely to be tipped into a higher tax bracket.
Capital gains tax is a tricky subject and can be difficult to navigate. It is also a much misunderstood tax. Therefore, our sub-tip is to seek professional advice from your accountant.
9. Back start-ups
Venture capital trusts invest in fledgling British businesses and pay out some of their returns to investors via dividends. Compared to traditional investments these are high-risk, but investors do receive a tax relief incentive to try and help these start-ups get off the ground.
Investing in VCTs or enterprise investment schemes (EIS) could give you 30pc income tax relief if you hold them for five years or three years, respectively. While they do not reduce your taxable income, they mean you get some money back via the relief.
You can get income tax relief for up to £200,000 of your annual investment in VCTs. For EIS, the maximum is £1m.
You also get 100pc capital gains tax relief if your shares grow in value, and up to 45pc loss relief if a company fails.
However, they tend to be fairly high risk so are not for everyone. You should only invest if they are suitable for your investment purposes and risk appetite, and you can afford to lose the investment.
You can apply for shares in VCTs when they open for new investment, whereas you can invest in EIS either directly, through investment platforms or through funds.
Where should you start?
Reviewing previous years’ higher rate tax payments is a crucial step for ensuring compliance and identifying potential savings. For that matter, our accountants also recommend reviewing all tax payments and creating effective Tax Planning strategies. Start by gathering all relevant financial documents, including tax returns, income statements, savings account statements, investment income statements, and any correspondence with HMRC. Carefully examine each year's records to ensure all income, deductions, and allowances have been accurately reported. Look for any discrepancies or missed reliefs that could affect your tax liability. It is also wise to compare your tax payments year-over-year to identify trends or significant changes. If you find any errors or have concerns about your previous filings, consider consulting a qualified accountant to help rectify issues and provide guidance on optimising your tax strategy for the future.
Why not give our local accountants in St Albans and Watford a call on 01727 730550, we’ll be more than happy to help.