Category: Blog

Higher-rate taxpayers: Beware of the 60% tax trap

The tapering of the Personal Allowance means some higher-rate taxpayers effectively pay an Income Tax rate of 60%, sometimes without realising. Fortunately, if you’re affected, there could be ways to reduce your tax bill.

A report in the Telegraph suggests 1.35 million workers were affected by the 60% tax trap in 2023/24. Collectively, they paid an extra £4.7 billion to the Treasury. Read on to find out if you could unwittingly be paying a higher rate of Income Tax than you expect.

The tax trap affects those earning more than £100,000

You might think the highest rate of Income Tax is 45%, and officially you’d be correct. Most people pay the standard rates of Income Tax. In 2024/25, Income Tax rates and bands are:

Please note, that different Income Tax bands and rates apply in Scotland.

However, the Personal Allowance is reduced by £1 for every £2 you earn over £100,000. If you earn more than £125,140, you don’t have a Personal Allowance and pay tax on all your income.

For example, if you earn £101,000, on the £1,000 above the threshold, you’d pay £400 of Income Tax at the higher rate. In addition, you’d lose £500 of your Personal Allowance, so this portion of your income would also be subject to Income Tax at 40%, adding up to £200.

So, out of the £1,000 you’ve earned above the tapered Personal Allowance threshold, you’d only take home £400 – a 60% effective tax rate. It’s led to the tapering being dubbed a “stealth tax” in the media.

Further compounding the issue is the fact that the Personal Allowance and Income Tax bands are frozen until 2028.

While the thresholds are frozen, many people are likely to receive wage increases. As a result, more people are expected to be caught in the 60% tax trap in the coming years.

Don’t forget your salary might not be your only income that’s considered when calculating your Income Tax bill. For example, you could be liable for interest earned on savings that aren’t held in a tax-efficient wrapper.

Contact us if you’re unsure which of your assets could be liable for Income Tax.

3 legal ways to avoid falling into the 60% tax trap

If you’re affected by the tapered Personal Allowance, thinking about how you structure your earnings may provide an opportunity to reduce how much you’re giving to the taxman. Here are three excellent options you might want to consider.

1. Boost your pension contributions

One of the simplest ways to avoid paying 60% tax if you could be affected is to increase your pension contributions.

Your taxable income is calculated after pension contributions have been deducted. As a result, boosting pension contributions could be used to reduce your adjusted net income so you retain the full Personal Allowance or reduce the proportion you lose.

Increasing pension contributions could help you secure a more comfortable retirement too. However, keep in mind that you cannot usually access your pension savings until you’re 55 (rising to 57 in 2028).

2. Use a salary sacrifice scheme

If your workplace has a salary sacrifice scheme, it could also provide a useful way to reduce your overall tax liability.

Salary sacrifice enables you to exchange a part of your salary for non-cash benefits from your employer. This could include higher pension contributions, childcare vouchers, or the ability to lease a car.

By essentially giving up part of your income, you might be able to bring your taxable income below the threshold for the tapered Personal Allowance.

You should note that salary sacrifice options vary between employers, so it may be worthwhile to check your employee handbook to see if any options could suit you.

3. Make charitable donations from your income

If you’d like to reduce your Income Tax bill and support good causes, you could make a charitable donation. Again, by deducting donations from your salary before tax is calculated, you could manage how much of the Personal Allowance you lose.

Contact us to talk about how to manage your tax bill effectively

There may be other steps you could take to reduce your overall tax bill. A tailored financial plan will consider your tax liabilities, including from other sources, such as your savings and investments, to highlight potential ways to cut the amount you pay to the taxman.

If you’d like to arrange a meeting, please get in touch.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients 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.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Read More
Investment market update: June 2024

2024 is a historic election year – elections will take place in 50 countries. More than 2 billion voters will head to the polls in countries including the UK, US, France, and South Africa throughout the year. Political uncertainty can affect investment markets and there was evidence of this in June.

During market volatility, remember that markets have, historically, recovered in the longer term. And, for most investors, sticking to their long-term investment strategy makes financial sense.

Read on to find out what affected investment markets around the world in June 2024.

UK

Despite hopes that the UK economy had turned a corner when it exited a recession in the first quarter of 2024, GDP figures were disappointing in April. Official figures show the economy flatlined when compared to a month earlier.

Yet, the Bank of England (BoE) remains optimistic. The central bank raised its second-quarter growth forecast to 0.5% after it revised upwards its May 2024 prediction of 0.2%.

There was further good news for the BoE too – UK inflation fell to its official target of 2% in the 12 months to May 2024 for the first time since 2021. The news led to speculation that the bank would cut its base interest rate, but the Monetary Policy Committee opted to hold it at 5.25%.

The positive inflation data sets the stage for a rate cut later this year, with the BoE saying it will keep interest rates “under review”.

As inflation pressures started to ease, figures from the Insolvency Service suggest fewer businesses are failing. The number of firms that became insolvent fell by 4% in May when compared to a month earlier. Even so, the number is 3% higher when compared to the same period in 2023.

Readings from the S&P Global Purchasing Managers’ Index (PMI), which measures business conditions, are also positive. In May:

  • UK factories returned to growth with the most rapid expansion of output in two years. The boost was mainly supported by domestic demand, as new export orders fell.
  • The service sector lost momentum but still posted growth. The slower pace is partly due to new orders easing when compared to the 11-month high recorded in April.

Uncertainty as UK political leaders campaigned ahead of the 4 July 2024 general election was partly linked to the FTSE 100 index, which includes the largest 100 companies listed on the London Stock Exchange, falling by 0.4% on 4 June.

Amid political turmoil in France, London regained its crown as Europe’s biggest stock market, which Paris has held for the last two years. According to Bloomberg, as of 17 June, stocks in the UK were collectively worth $3.18 trillion (£2.52 trillion) compared to France’s $3.13 trillion (£2.48 trillion) valuation.

Europe

At the start of the month, the European Central Bank (ECB) slashed its three key interest rates by 25 basis points in the first cut since the start of the Covid-19 pandemic.

Yet, figures released by Eurostat just two weeks later showed inflation was 2.6% in the year to May 2024 across the eurozone, up from 2.4% in April. The news prompted some commentators to speculate the cut to interest rates had been made too soon.

PMI data was positive in the eurozone as business activity grew at the fastest rate this year. Of the top four economies in the bloc, only France contracted slightly, while Germany, Spain, and Italy posted growth.

President of France Emmanuel Macron called a snap election, which is set to be held between 30 June and 7 July. The election has added to the political uncertainty affecting markets.

Indeed, on 10 June, France’s CAC index, which is comprised of 40 of the most prominent listed companies in the country, was down 2%. The effects were felt in other stock markets too, with Germany’s DAX falling 0.9% and Italy’s FTSE MIB losing 0.95%.

In response to the snap election, credit ratings agency Moody’s issued France with a credit warning, stating there was an increased risk to “fiscal consolidation”. Citigroup also downgraded its rating for European stocks from neutral to overweight due to “heightened political risks”.

US

The New York Stock Exchange got off to a rocky start in June. On 3 June, a technical issue led to large fluctuations in the listed prices of certain stocks. Warren Buffett’s Berkshire Hathaway was affected by the glitch, which suggested shares had fallen in value by 99%. Fortunately, the issue was resolved within an hour.

The rate of inflation fell to 3.3% in May 2024 but remains above the Federal Reserve’s target of 2%.

The drop in inflation led to a boost for Wall Street. On 12 June, both the S&P 500 index, which includes 500 of the largest companies listed in stock exchanges in the US, and tech-focused index Nasdaq opened at all-time highs.

Figures from the US Bureau of Labor Statistics indicated that businesses are feeling confident about their future. 272,000 jobs were added in May, far higher than the 185,000 Wall Street has forecast. Yet, unemployment also increased slightly to 4%.

Tesla shareholders voted in favour of CEO Elon Musk’s huge $56 billion (£44 billion) pay package – the largest corporate pay package in US history by a substantial margin. The results of the annual general meeting led to Tesla shares rising by around 6.6%, which helped recover some of the 28% losses they’ve suffered so far this year.

Asia

Moody’s raised China’s growth forecast to 4.5%, up from 4%. While growth of 4.5% would be great news in many developed countries, it would mark a slowdown for China, which saw its GDP rise by 5.2% in 2023.

However, signs of a trade war starting between China and the EU loomed and could dampen growth expectations.

The EU notified China that it intended to impose tariffs of up to 38% on imports of Chinese electric vehicles. The move would trigger duties of more than €2 billion (£1.69 billion) a year. The announcement followed an investigation into alleged unfair state subsidies and similar tariff increases from the US earlier this year.

In retaliation, China opened an anti-dumping investigation into imported pork and its by-products from the EU. China is the EU’s largest overseas market for pork, which was worth $1.8 billion (£1.42 billion) in 2023.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Read More
The value of financial planning: How it could help you achieve your aspirations

Often one of the biggest benefits of a bespoke financial plan is that it allows you to devise a blueprint to follow, with your goals placed at the centre. It’s a strategy that could help you focus on what you want to achieve in life and make working with a professional even more valuable to you.

Over the last few months, you’ve read about how a financial plan could help you grow your wealth and the value of non-tangible benefits, like feeling more confident about your finances. Now, read on to discover how financial planning might help you align your decisions with your aspirations.

Your goals are the focus of your financial plan

While you might think of financial planning as being about figures and growing your wealth, it goes far beyond this. Financial planning aims to help you reach your goals, whether you want to retire early, have the money to book holidays to exciting destinations or be in a position to offer support to your family.

To achieve this aim, financial planning starts by understanding what your goals are. Having a clear idea about what your aspirations are could allow you to make decisions that enable you to turn them into a reality. So, defining what success means for you is often crucial.

For example, you might start by saying your family is a priority and you want to offer them support. But what does this look like? Do you want to offer financial support, such as a deposit when they’re buying a home, or do you want to have greater freedom so you can look after your grandchildren?

As financial planners, we can help you define your life goals and understand what’s possible.

Cashflow modelling could help you visualise the impact of your decisions

One of the challenges of setting out how to reach your long-term goals is that it can be difficult to know whether the decisions you’re making will support or harm them.

Cashflow modelling can be used as an invaluable tool to help you visualise the impact decisions might have on your financial future and, so, on your goals.

When using cashflow modelling you input data like the value of your assets now. You can then model how different decisions will affect the outcome. It’s a way of understanding how the decisions you make now could affect goals that are years away.

If your goal is to retire early, you might update the information used for cashflow modelling to answer questions like:

  • Could I afford to retire five years earlier?
  • If I retire when I’m 55, what income could my pension sustainably provide?
  • Could I take a tax-free lump sum from my pension when I first retire and still be financially secure?
  • How would increasing or decreasing my pension contributions affect the value of my pension pot at retirement?

Armed with the information cashflow modelling provides, you’re often in a better position to make financial decisions that reflect your aspirations.

A financial plan may keep your goals on track as your circumstances change

You might set out clear goals now, but as your circumstances and desires change, they may not be the same in five years.

A family illness might mean you decide to step away from work sooner than you expected to support them. Or an unexpected inheritance may mean you’re able to secure goals you previously thought were out of reach.

By having an ongoing relationship with a financial planner and regular reviews, which will include reassessing your aspirations, we can help you adjust your plan, so it continues to suit your needs.

It’s not just your goals that could lead to change either.

You might come across an investment opportunity and decide you want to divert some of the money to this. A financial plan could help you assess if it’s the right decision for you and how it might affect other parts of your plan.

For instance, could choosing a higher-risk investment rather than contributing to your pension place your comfortable retirement at risk? Or are you in a position where you can invest and still feel confident about your retirement?

By modelling opportunities or obstacles using cashflow modelling, working with a financial planner could help you understand the impact of making changes to your plans as opportunities arise.

Contact us to talk about how a financial plan could be valuable for you

As you’ve read over the last few months, a tailored financial plan could provide financial and non-financial benefits. If you’d like to explore how a financial plan could add value to your life, please contact us.

In an initial meeting, we can discuss how we could work together to help you reach your goals.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

The Financial Conduct Authority does not regulate cashflow modelling.

Read More