Inflation was never far from the headlines in 2022, as rapidly rising costs saw inflation figures regularly sitting in double digits.
In an environment like this, you might have expected tax thresholds to be adjusted accordingly, to keep pace with wage increases over the same period.
However, this has not happened, with the government instead announcing freezes to tax bands that will increase the tax take for the Treasury. As a result, many individuals may face a higher rate of tax on their income over the coming years.
Indeed, figures already show that this is happening, with 100,000 taxpayers forced into the higher-rate band last year, and more than 1 million more to be dragged into a higher tax band by 2027.
So, find out why this is happening, and what you might be able to do to make your money as tax-efficient as possible.
100,000 people in a higher tax band, and 1 million more to be pulled into one by 2027
Historically, tax bands have been adjusted over time to keep them in line with rising inflation.
However, during his time as chancellor, Rishi Sunak froze the higher-rate Income Tax band at its current level until 2026. That means those with an income of £50,271 or more will face a 40% tax charge on the portion of their income that exceeds this threshold.
According to FTAdviser, HMRC figures show that this freeze pulled 100,000 more taxpayers into the higher-rate tax band last year alone.
Furthermore, current chancellor Jeremy Hunt extended the freeze on the higher-rate tax band to 2027/28 during his 2022 autumn statement. This, FTAdviser reports, will see more than 1 million more taxpayers pulled into a higher tax band by the time this freeze ends in 2027/28.
For you as a rugby player, this could present an issue in your career if you are set to receive a wage increase, such as if you will need to negotiate your contract or are intending to switch clubs, over the next four years.
If you are in this position, you may find yourself dragged into a higher tax band when you come to do either of these things, simply because your earnings have increased while the tax bands remain static.
Increasing your pension contributions to make your money as tax-efficient as possible
If you have already found yourself in a higher tax band, or think there is a possibility of this happening to you over the next four years, you may be wondering if you can do anything to reduce the amount of tax you are set to have to pay.
Fortunately, there are plenty of different methods you could consider that could help you mitigate your tax bill and make your money as tax-efficient as possible.
One option you could consider for doing this could be by increasing the amount you pay into your pension. This could be a prudent choice as you may be able to claim more tax relief on your contributions, as the tax relief you can claim is determined by the rate of Income Tax you pay.
While a £100 pension contribution effectively “costs” £80 for a basic-rate taxpayer, this falls to:
- £60 on contributions from income in the higher-rate tax band
- £55 on contributions from income in the additional-rate tax band.
So, if you have found yourself in a higher tax band, you may be able to partially offset this by contributing more of your income to your pension and benefiting from higher rates of tax relief.
Bear in mind that only income that exceeds the higher tax band threshold will be eligible for the higher rates of relief. So, for example, if you had an income of £60,000 a year, only the £9,729 that exceeds the £50,271 of the higher-rate Income Tax band would be eligible for relief at 40%.
Additionally, while basic-rate relief is typically applied automatically, you will need to claim higher- and additional-rate tax relief through your self-assessment tax return.
Get in touch
If you would like to find out how to make your money as tax-efficient as possible in your personal circumstances, please do get in touch with us at DBL Asset Management.
Email email@example.com or call 01625 529 499 to speak to an expert financial planner today.
This article is for information 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.
The value of your investment 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.
The Financial Conduct Authority does not regulate tax planning.