According to the Telegraph, more than 1.2 million people could be pushed up into the higher-rate Income Tax band by 2026, thanks to the chancellor’s decision to freeze tax thresholds. The freeze, which was announced in March 2021, means some clients could be liable to 40% Income Tax instead of 20%.
The tax hike probably couldn’t come at a worse time, as the cost of living soars, with the Bank of England (BoE) predicting that inflation will exceed 7% by April 2022.
It isn’t all bad news though, as there are several ways your client could reduce their Income Tax liability. Read on to discover five clever steps they could take to become more tax-efficient.
1. Use salary sacrifice
If your client’s employer agrees to salary sacrifice, the individual can increase the contributions to their workplace pension, then reduce their salary by the same amount. This could be enough to drop them back down to the basic-rate tax band, which means they would be liable for 20% Income Tax. In return, they would receive a larger pension contribution.
Doing this could also reduce the amount your client pays in National Insurance contributions (NICs). This could be particularly useful, as the main rate of NICs will rise to 13.25% (from 12%) in April 2022.
While salary sacrifice sounds like the ideal solution, care must be taken. As your client is reducing their salary, it could make it more difficult for them to secure a mortgage. It could also affect other benefits, such as death in service.
2. Pay more into your pension
As a higher-rate taxpayer your client will receive pension tax relief at their marginal rate. This means that every £100 they contribute to their pension will cost just £60, as opposed to the £80 it costs them as a basic-rate taxpayer.
That said, there may be a catch. According to the Telegraph, 80% of higher-rate taxpayers do not claim all their tax relief.
This is because the government doesn’t give higher-rate taxpayers their full 40% tax relief at source. Instead, clients typically benefit from 20% basic-rate tax relief automatically, and the remaining 20% should be claimed through self-assessment.
This means it’s vital that your client claims all their relief through self-assessment, something a financial planner can assist with.
3. Give money to charity
If your client donates to a charity, the organisation can claim tax relief through Gift Aid. The scheme allows UK registered charities or community amateur sports clubs (CASC) to claim the basic-rate tax paid on the money donated, as long as the donor is a UK taxpayer.
This means that the charity or CASC receives a 20% uplift from the government on the money your client gives them. For example, if your client donates £1,000 via Gift Aid, the charity will receive £1,250 after tax relief is added.
In addition, as a higher-rate taxpayer, your client can also claim the difference between the rate they pay and the basic rate on their donation. Clients would normally claim this additional relief through self-assessment.
4. Ensure your tax code is correct
A tax code lets your client’s employer know how much Income Tax should be deducted from their salary.
Typically, the tax code is their Personal Allowance, which is the amount they’re allowed to earn before becoming liable to Income Tax. In 2021/22, this is £12,570, so the tax code could be 1257L.
If a client’s tax code is incorrect, they could be receiving too little a Personal Allowance and, consequently, paying too much Income Tax. Your client should check the tax code they are on, and make sure it’s accurate.
5. Use company benefits
Another way your client could reduce their Income Tax liability is by using company benefits. As some employers offer benefits through salary sacrifice, your client’s income could reduce back down to a level within the 20% Income Tax band while receiving a perk they would like to have.
The type of schemes that may be available could include:
- Cycle to work
- Electric car charging
- Electric company car (as this could be more tax-efficient than fossil fuel cars)
- Tax relief on household costs and equipment for someone who works from home
- Health screening and medical services.
Exchanging salary for one or more of these perks could help to reduce a client’s Income Tax liability.
Get in touch
If you feel your client would benefit from a conversation about how to be more tax-efficient, please contact us on hello@ardentuk.com or call 01904 655 330.
As award-winning specialists in financial planning, you can have peace of mind that we’ll provide the right solutions for your clients with the highest levels of service.
Please note
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
