While the good news for high earners in the Budget will see the 50% tax band being reduced to 45% from April 2013, a bigger anomaly still exists - a 60% income tax band.
The personal allowance - the first slice of someone's income that is not subject to income tax - is gradually removed once earnings exceed £100,000. The personal allowance in 2012/13 will be £8,105 but will reduce when income reaches £100,000 and disappear for those earning approximately £116,000 and over.
People affected by this may want to pay a pension contribution to reduce their taxable earnings to £100,000 or, even more tax-efficiently - use a salary sacrifice arrangement, whereby they give up some of their salary in return for an employer pension payment.
Andrew Tully, Pensions Technical Director at MGM Advantage said:
‘The withdrawal of the personal allowance remains a big tax anomaly with people being taxed at 60% on a slice of their income above £100,000. Those with incomes of slightly less than £100,000 may want to restructure their savings to minimise income. For example, bonds do not produce income so they may be useful tools in helping to ensure people keep their full personal allowance. Those who do earn above £100,000 may want to make a pension contribution to retain their personal allowance.'
Example pension contribution to retain personal allowance - based on 2012/13 figures
|
|
Before Pension Payment |
After Pension Payment |
|
Gross Income |
£166,210 |
£116,210 |
|
Gross pension contribution |
NIL |
£16,210 |
|
Taxable Income |
£116,210 |
£100,00 |
|
Personal Allowance |
NIL |
£8,105 |
|
Total Tax |
£39,610 |
£29,884 |
|
Employee National Insurance |
£5,811 |
£5,811 |
|
Take Home Pay |
£70,789 |
£64,305 |
Reduction in take home pay of £6,484 but pension contribution is £16,210. So effective tax relief is 60%.
|
