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Demystifying Tax Rates: Are You Really Paying 71%?

Ever wondered if the tax on your income is more than meets the eye? Let’s unravel the numbers and explore why, as a high earner, you might be facing a tax rate of 71%, especially with the Autumn Statement just around the corner.

 

The Surprising Truth for High Earners

If your income falls between £100,000 and £125,140, the official tax bands say 45%, but the reality is a bit different. You could be handing over 62% of your hard-earned money to HMRC. And if you’re a university graduate who started from 2012 onwards and took a sizable student loan, that number can climb to a staggering 71%.

 

Understanding the Math

Calculating your tax isn’t as simple as the 20%, 40%, or 45% bands suggest. Beyond the personal allowance of £12,570, national insurance kicks in, pushing even basic rate taxpayers to around 32%.

The plot thickens when you hit the £100,000 mark. Your tax-free personal allowance starts to fade, losing 50 pence for every extra pound you earn. Toss in the 2% employees’ NIC, and suddenly you’re looking at a total of 62% in taxes.

 

The Quiet Tax and the Plea for Change

The Institute for Fiscal Studies anticipates that more people will soon face a 40% tax rate. The Times, supported by The Centre for Policy Studies, is rallying against this silent tax, urging the government to reconsider and lighten the load for those making over £100,000.

 

Graduates Caught in the Crossfire

Post-2012 graduates earning six figures face an additional hurdle with student loan repayments. Paying 9% over £27,295, they find themselves in a staggering 71% tax bracket. It’s a unique situation, but for those in this category, there are ways to ease the financial strain.

 

Easing the Burden: 5 Practical Tips

  • Boost Your Pension: Increase contributions before the tax year ends to trim earnings in higher tax brackets and enjoy tax relief.
  • Embrace Salary Sacrifice: If offered by your employer, sacrifice some salary for pension contributions or other perks, reducing your taxable income.
  • Bonus Strategy: Be cautious with bonuses; consider bonus waivers to contribute to your pension, sidestepping higher tax brackets.
  • Give Back and Save: Higher earners can claim the tax difference on Gift Aid donations to charities, benefiting both the giver and the cause.
  • Stay Informed: With the Autumn Statement imminent, keep an eye on potential changes that could impact your tax situation. Act on any beneficial alterations before the current tax year concludes or the new one begins on April 6, 2024.

 

In the intricate world of taxes, knowledge is power. Take control of your financial landscape, explore these strategies, and retain more of your earnings in your pocket.

 

Founded in 2017, Fintuity has fast become one of the only digital Independent Financial Advisers (IFA) in the United Kingdom.  Fintuity offers a wide range of financial advisory services including pensions, protection, investments and mortgage advice. The key difference is that as an exclusively digital service, we can offer significant savings and a service that is direct to you and on demand.

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