Higher Earners Tax Rate
The highest rate of tax will be paid by more people after the threshold is reduced, following the Chancellor’s Budget announcements. The Chancellor has changed the level at which the 45% additional rate of tax applies from, lowering it from £150,000 to £125,140 – meaning that higher earners will be paying a higher tax rate.
This change will take effect during the 2023/24 tax year and brings the threshold in line with the point at which the Personal Allowance is removed entirely. The allowance is currently frozen at £12,570 for 2023/24 tax year and for those earning more than £100,000 a year, the Personal Allowance is reduced by £1 for every £2 earned above the limit.
Extra Tax Due
While this change will cost an extra £1,243 a year in tax, it may make it more appealing for higher earners to put money into their pension. To quote Steven Cameron, Pensions Director at Aegon:
“In current conditions, it’s not surprising that those who can afford to shoulder a greater part of the burden of tax increases are being asked to do so.
Note that the existing gradual phasing out of the Personal Allowance once individuals earn over £100,000, means earnings between £100,000 and £125,140 are already effectively taxed at 60%. It now means thereafter, the marginal rate will be 45%.
Together, these higher rates of income tax make paying personal contributions to pensions, which get relief at full marginal rate, particularly appealing.”
Following the Budget announcements, pensions got a significant overhaul to make retirement saving more appealing. This comes with an increase in the amount you can put into your pension each year and the effective removal of the limit your pension can reach before you face serious penalties. Read more about it here: A Significant Overhaul for Pensions
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