If you’re earning over £100,000 you should be looking forward to spending your money on nice things, not looking forward to a tax bill from HMRC. However, most people are shocked to discover you pay around 62% in tax and national insurance on earnings between £100,000 and around £125,000. And 64% in Scotland!
This is because whilst everyone in the UK is normally entitled to tax-free personal allowances of around £12,500, those earning over £100,000 start to have this allowance removed at a rate of £1 for every £2 of income over £100,000. So as you earn in this zone, not only are you being taxed on the money you earn but you’re also losing the initial tax-free personal allowance. So, for every £1 earned in this zone you’ll be left with just 38p, or 36p in Scotland.
Many people can be pushed over the £100,000 threshold by bonuses, company benefits and by adding in income from other sources.
However, you can potentially put your money to good use and reduce your tax if this affects you!
Firstly, you can use our marginal rate calculator to see what rate you’re paying.
Secondly, you can take advantage of the fact that HMRC lets you deduct certain things from your income when working out how much goes over the £100,000 threshold, these things include:
- Pension contributions
- Donations to charities through gift aid
- Trading losses
So, in order to reduce your tax, you could:
Save more money into a pension
You normally get basic rate tax relief at source on pension contributions, so for every 80p you pay into your pension, £1 will be credited to your pension pot. The value of this gross contribution can then be deducted from your income, and if this takes your total income below £100,000, you’ll get the triple bonus of retaining your personal allowances, getting tax relief on your pension contributions and being able to claim additional pension tax relief on top of this! This means a £25,000 credit to your pension pot can potentially only cost you £10,000 after tax benefits are accounted for.
Our marginal rate calculator takes all these factors into account and helps you see how much tax an additional pension contribution could save you, and the impact of this on your marginal rate.
Pension contributions can be made to your own SIPP, a company pension or another private pension (subject to certain limits), but you’ll need to make these contributions before the tax year ends on 5 April. You can find more details in our article about pension contributions.
Sacrifice some of your bonus or salary for a non-cash bonus
Some employers offer salary sacrifice schemes. These allow you to sacrifice part of your salary for ‘non-cash’ benefits such as: an additional pension contribution, childcare or an ultra-low emission car. Entering into such a scheme could potentially bring your income under the £100,000 threshold.
You can read more about this in our salary sacrifice article.
Make a donation to charity
If you make a gift aid donation to charity then you can take the ‘grossed-up’ amount off your income. Our marginal rate calculator does this for you – if you enter the amount you’ve paid, or intend to pay to charity. You obviously won’t get the same long-term personal benefits as from paying into your pension but you’ll be putting something back into society. You can read more in our article about charitable donations.
How can untied help?
untied gives you the tools and information to help you make the tax choices that are best for your circumstances. untied always has your tax position up to date … so you’re always in control. When the time comes to file your tax return with HMRC you can do this quickly and effortlessly with untied. Sign up for an untied account on this page.