UHY Ross Brooke Chartered Accountants

Act now to obtain 60% tax relief on your income

couple paying tax
Tom Annat Tax Manager blog image

The reduction of the additional rate tax threshold in 22/23 from £150,000 to £125,140 would have resulted in many more taxpayers paying tax at 45%. This lower threshold will continue into the current tax year commencing 6th April 2024. The position is made worse by the fact that the personal allowance is entirely lost where income exceeds £125,150, resulting in a 60% effective tax rate. The position can be improved by way of a pension contribution which is discussed below.

By Tom Annat – Senior Tax Manager

Since 6th April 2023 the additional rate threshold (the point at which 45% tax starts to be paid) has been £125,140. This threshold will continue during the tax year commencing 6th April 2024

Personal allowance restriction

Individuals earning between £100,000 and £125,140 will continue to see their personal allowance abated by £1 for every £2 of income over £100,000. This is a particularly bad ‘sweet spot’, as the effective rate of tax is 60% on income in this bracket.

A very efficient way of dealing with this issue is to consider a personal pension contribution. The amount of the gross contribution is deducted from income for the purpose of the personal allowance abatement. For every £1 contributed, £1.25 of the personal allowance is restored.

Examples

If we look at an example, someone earning £125,140 would pay income tax of £42,516. A net pension contribution of £8,000 would produce a refund via self-assessment of £4,000 and the personal allowance would be restored to £5,000. The contribution would be topped up by the government, meaning that £10,000 would be received by the pension fund which has only cost the individual £4,000.

In a further example, if someone on the same income as above wanted to fully restore their personal allowance (£12,570), it would require a net pension contribution of £20,112. This would produce a refund via self-assessment of £10,056. A total of £25,140 would enter the pension pot which would have cost £10,056.

Time is running out to make a pension contribution in the current tax year

If you are considering making a pension contribution, then this will need to be made by 5th April 2024 for it to fall within the 2023/24 tax year

Financial advice

Contributing to a pension is an investment decision and UHY Ross Brooke is not regulated to provide financial advice. You should take independent financial advice if you are unsure of your position and options.

Next steps

The tax position around pensions is complex and there are other rules to be considered prior to making a contribution. If you require further advice, then please get in contact with us.

 

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