Insights

Government statistics have highlighted that more people than ever are paying income tax at one of the two highest rates; there is the ‘additional rate’ of 45%, which is incurred by people with income above £150,000, and there is the more commonly encountered 40% ‘higher rate’ of tax, which is charged on income between £46,351 and £150,000. If you pay tax at one of these rates, here are 5 ways you’re probably being hit with higher bills now than in previous tax years.

Why are we paying more tax?

1. The UK’s additional rate taxpayers are paying an extra 9% in income tax than they did in 2016, generating £4.3bn more for the Treasury. Estimates expect this revenue to increase by another £3.6bn by next year.
2. Higher rate taxpayers are also generating additional incomes, with an extra £1.3bn going to the Treasury in total.
3. Successive cuts to pensions tax relief have slowly eroded the potential for additional rate tax payers in particular to make sizeable contributions. Currently, a maximum of £10,000 can be invested into a pension each year by anyone in the 45% additional rate without incurring penalties.
4. The lifetime investment allowance for pensions has also been cut and the maximum that can be invested within a personal pension without incurring penalties is just over £1m, whereas it was £1.8m six years ago.
5. Perhaps the biggest impact on the levels of income tax paid by higher earners is due to rising wage inflation, which has moved more people into higher tax brackets than ever. Estimates suggest that wages have risen by 26% since 2008 and this tax year, over 4.7bn people will face the higher or additional tax rates.

As this article highlights, proactive tax planning and finding ways to utilise all the available tax reliefs and personal allowances, is more important than ever. If you would like to discuss ways to cut your tax bill, please contact Lesley Stalker by emailing partners@rjp.co.uk.