UK Financial Adviser

Caught in the tax trap?

You got a pay raise and your salary is now on the threshold of the 40% tax rate. How do you avoid the potential tax trap?

Luckily, it may be possible to avoid it after all because any contributions you make into your pension are deducted from your salary before you are taxed. In other words, your taxable salary is reduced. 

Example 1

Sally earns a gross salary of £50 000. On this salary, she pay basic rate tax of £6 900 and higher rate tax of £3 650.  If Sally was to make a pension contribution of £3 650, her gross taxable income would reduce to £46 350 saving her £1460 in tax thus avoiding the tax trap.

Total tax savings after pension contribution = £1 460 (40% tax trap).

Example 2

Barbara earns a gross salary of £110 000 and is a Higher Rate Tax payer

Barbara contributes £10 000 of her salary to her pension on an annual basis reducing her taxable income to £100 000 per year.  By doing this, she saves £6 000 on her potential tax bill of £34 360.

*Personal allowance of £6,850 due to the tapering of income above £100,000 (whereby you sacrifice £1 of personal allowance for every £2 of income until your personal allowance is £0)

Total tax savings after pension contribution = £6 000 (60% tax trap).

Remember that the Tax Year end is coming up on 5 April. Act fast so we can help you submit those tax returns!

Note: Don’t leave it until the last minute.  Remember to allow 10 working days to  get funds in place.

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