New laws could leave you with less
Answer: when your tax band changes. Workers with children and higher earners can lose out, as Laura Suter explains
Under the UK’S fiendishly complicated tax system, getting a pay rise can actually bring a cut to your take-home pay. Millions of Britons will get to keep more of their hard-earned money from this month, after Government changes to income tax bands.
The amount that every individual can earn tax-free has increased from £11,500 to £11,850, and the tax thresholds are higher, too. The limit at which you pay basic-rate (20pc) tax has risen from £33,500 to £34,500, while the start of the 40pc tax band has risen from £45,000 to £46,350.
However, when a pay rise does move you into one of the higher tax bands, earning more money comes at the cost of losing valuable tax breaks. Our guide lays out who will fall foul of the system – and how to beat it.
Earning £46,350-plus
As of last week, anyone earning more than £46,350 will pay 40pc tax on income over this limit.
Sarah Coles, of Hargreaves Lansdown, the broker, said: “Once you have taxable income of more than £46,350, you start to hit a succession of expensive thresholds that can do real damage to your take-home pay.
“They can leave you paying effective tax rates of 60pc and, in some cases, can actually leave you worse off after a pay rise than you were before it.
“It’s essential to take steps to ensure you’re not paying a penny more in tax than you need to.”
Anyone who tips over into the higher-rate band will see the amount of tax-free savings income they can earn cut in half, from £1,000 to £500. This means that an additional £500 of income would be taxed at 40pc, costing £200.
The tax you pay on your dividends will also rise once you hit the higherrate threshold, from 7.5pc to 32.5pc.
Every individual has £2,000 of dividend income they can earn tax free. This has already been cut from £5,000 from April 6 this year.
This means someone with £5,000 a year of dividend income, who has also moved from the basic-rate to higherrate tax band, will go from paying no dividend tax to having a £975 tax bill.
Higher-rate taxpayers who sell their investments for a gain also face a hike to the amount of tax they pay on this money. Every individual can make £11,700 in capital gains each year before paying tax. Anything over this sum is taxed at 10pc for basic-rate taxpayers or 20pc for higher-rate payers. A higher-rate taxpayer with a taxable capital gain of £10,000 will pay £2,000, up from £1,000 in the lower band.
Couples could also be hit if one partner moves into the higher-rate tax bracket and they lose the “marriage allowance”, which saves up to £238 a year.
The marriage allowance allows one spouse to offset their tax-free allowance against the other partner’s earnings. To be eligible one of the couple must earn £11,850 or less, while their other half must be a basic-rate taxpayer – meaning that if you become a higher-rate payer you lose the perk entirely.
Earning £50,001 to £60,000
Parents who get a pay rise that takes their pay beyond £50,000 will start to lose the valuable child benefit tax break.
Child benefit is paid to parents of children under the age of 16. It pays out £20.70 a week for the first child and then a further £13.70 for any additional children.
For every £100 earned above the £50,000 threshold, parents will lose 1pc of their child benefits. Once earnings hit £60,000 the entire benefit is lost. For example, someone earning £55,000 would need to repay £538 of their benefit, if they had one child.
Earning more than £100,000
If you’re fortunate enough to be in the top 3pc of UK earners, you will lose a valuable tax break – and will pay 60pc income tax on a large chunk of your earnings.
Anyone earning more than £100,000 starts to lose their tax-free personal allowance (£11,850) at a rate of £1 for every £2 you earn over £100,000 – meaning the allowance is completely wiped out by the time you earn £123,700.
It effectively makes your rate of tax on this chunk of money 60pc – far higher than any UK income tax rate.
Earning £150,000-plus
Income over £150,000 is in a different tax bracket, the additional rate, charged at 45pc.
Additional-rate taxpayers who are in the top 1pc of UK earners, lose their entire personal savings allowance and face a higher 38.1pc tax on any dividend income (up from 32.5pc). A person with £1,000 of savings income who moves into the additional-rate tax bracket will pay £450 in tax, compared with £200 for a higher-rate taxpayer, or £0 for a basic-rate earner.
This group of earners will also see the amount they can save into a pension each year significantly cut. Basic-rate and higher-rate taxpayers can save up to £40,000 into their pension each year. But for additionalrate taxpayers this allowance is cut by £1 for every £2 your taxable income exceeds £150,000, until the allowance falls to £10,000.
The calculation to work out which earnings are eligible and to determine your annual allowance, is particularly complicated and even befuddles some professionals.
This has led some employers to cut the annual pension allowance to £10,000 for any high earners, in order to avoid falling foul of the rules.