How to Make the Most of Becoming a 40% Taxpayer
How to Make the Most of Becoming a 40% Taxpayer
Over 750,000 people are about to be catapulted into the 40$ tax band.And despite Nick Clegg's belief that "they won't really notice it", there is no doubt that those earning more than 42,000 a year should be thinking about methods of minimising the impact of this extra demand on their earnings.Faced with paying higher tax, personal pension contributions suddenly become much more attractive. If you spend everything you earn and are about to enter the 40% tax band with the resulting deduction in the wage packet, then it's not that easy. However if you are on the cusp of being a higher rate payer, it is more tax efficient to make a pension contribution.Someone just on the cusp of the higher tax limit will almost certainly not be a 40% tax payer in retirement which means that you will saving 40 per cent on the pension contribution but only paying the basic rate when you retire. This makes pensions the most tax efficient arrangement even in these difficult times. You could describe it as 40% on the way in, 20% on the way out but in fact it is even more than that as most people will take their 25% tax free lump sum so it becomes 15% on the way out.There is also another way to make a pension even more tax efficient. If you are employed and are going to find yourself in the 40% tax bracket, you should seriously be thinking about asking your employer to consider a salary sacrifice arrangement.Salary sacrifice goes by a number of different names such as salary exchange or smart pay but they are all generic terms for same idea - you agree to give up part of your salary in return for the employer paying that amount into the pension scheme. Even though pension contributions benefit from tax relief, they don't attract National Insurance relief. A person who is paying income tax at 40% will be paying National Insurance on the extra earnings of 1%, which doubles to 2% in the next tax year. However, if your employer pays that amount into a pension scheme, you will be saving all the NI.HMRC is quite happy with this so long as all the paperwork is done correctly - but it doesn't stop there. While an employee on 40% income tax is paying 2% NI, the employer is currently paying 12.8%, which is going up to 13.8% in the next tax year.The more savvy boss may agree to put his NI contribution into your pension, effectively giving you 40% tax relief, in addition to your own 2% NI and your employer's 13.8%.If your employer will do this, you could then be getting more than 55% relief on pension contributions. Get both in place and suddenly the world doesn't look quite so grim!The reason that more people are going to find themselves paying 40% is that the size of the basic rate tax band is being reduced.Because from next year the personal allowance is going up to 7,475, the government is making sure that people towards the top end don't benefit from this increase - for people earning over 42,000 you might say they are giving with one hand and taking away with the other.The idea is to make sure the lower paid gain benefit but not to give this benefit to the higher paid. If the government has got its sums correct, people just below the new 40% band should end up with the same money in their pay packets as before. History of Online Ecommerce – Shopping on the Net Online Jewellery shopping: Get the best range and lowest prices Shopping Online for Discounts and Coupons Accounting Firms Are Better Off With Pay Per Lead Why to buy property in Greece? How to buy saffron spice? Buy Products In Feasible Rates Through Online Shopping How eCommerce Solutions are Changing the Face of Online Shopping How to Manage Your Companies- Payroll Do You Know Where To Buy Hydroxatone? Save Time by Online Shopping Service Methods for Online Shopping Understanding the Basic Points to Buy Euro Millions Ticket