The income tax thresholds, when tax starts to be payable at each rate will increase on 6 April 2021 but thereafter will be frozen until 2026.
This means more people gradually paying more tax as pay rises take their income over the thresholds when tax at 20%, 40% and 45% become payable. (21%, 41% and 46% in Scotland).
To lessen the impact of rising taxes individuals can make pension savings or donate to good causes under the gift aid scheme. Both reduce total tax payable, but also enable eligibility for other allowances and benefits, otherwise lost, to be retained or restored.
Pension Savings Tax Relief
Saving into a pension plan attracts tax relief at the taxpayer’s highest marginal rate. Non taxpayers and basic rate taxpayers get £2 added to every £8 they save. Higher rate taxpayers get £4 and top rate taxpayers £4.50. (Residents in Scotland get 1p in the £ extra relief).
Gift Aid Relief
When making charitable donations taxpayers may use gift aid so the charity collects relief from HMRC which boosts the gift made by 25%.
Higher rate and top rate taxpayers may also offset gift aid donations against their taxable income, giving them an additional 20% or 25% tax relief. (21% and 26% in Scotland).
But the savings don’t stop there because saving into a pension or making gift aid donations reduces the income counted towards eligibility for other tax allowances and benefits.
1. Marriage Allowance
Can save married and civil partner couples up to £250 in tax each year by a non-taxpayer transferring 10% of their nil rate tax allowance to a basic rate taxpayer, so that less of their income is taxable.
Where individual income is over £12,500 (£12,570 from 06/04/21) /or £50,000 (£50,270 from 06/04/21) respectively, this allowance is not available. Couples marginally over these thresholds can restore eligibility by making pension savings or gift aid donations.
2. Tax Free Savings Allowance
Up to £1,000 of interest may be earned tax free by basic rate taxpayers whose income is below, £50,000. Higher rate taxpayers with income between £50,000 (£50,270 from 06/04/21) and £150,000 may keep £500 tax free but top rate taxpayers with income over £150,000 have no allowance.
The first £5,000 of savings income is taxed at a nil rate where the total taxable income of the saver is below £17,500
Saving for retirement into a pension or making gift aid donations can increase the allowance available by reducing the income below these thresholds.
3. Tax Free Child Benefit
Child benefit is taxable if one adult in the household has taxable income of more than £50,099. The benefit is taxed at 1% for every £100 of income over £50,000. Once income is over £60,000 it is taxed at 100%.
Eligibility for tax free child benefit can be restored by making pension savings or gift aid donations which reduce taxable income below these thresholds. For a two-child family that would be worth £35 per week until aged 16, or 20 if in full time education.
4. Personal Tax Allowance
Taxpayers with income over £100,000 lose the personal allowance on which no income tax is payable (£12,500). This is reduced on a sliding scale of £1 of allowance for every £2 of income. Once income hits £125,000 no allowance is available.
Making pension savings and gift aid donations reduces the income counted on a £ for £ basis so that some or all personal allowance can be restored saving up to £5,000 in tax in addition to 40% tax relief on the pension savings or donation.
5. Tax Free Childcare Account
Parents of under 12s, who both earn at or above the minimum wage, can claim for help with childcare costs. Every £8 saved in a Tax-Free Childcare Account attracts £2 of taxpayer subsidy. Each account may hold up to £10,000 per child per year.
Once one adult has income of more than £100,000*, they are ineligible for tax free childcare. Pension savings and gift aid donations reduce the income counted and can restore access to this taxpayer subsidy.
*This income ceiling has been temporarily relaxed for key workers during the pandemic.
To find out which of these extra allowances you may qualify for by making pension savings or gift aid donations please contact your usual LEBC adviser, use our live chat facility, call 0800 055 6585 or email firstname.lastname@example.org.
Public Policy Director
Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. The contents of this blog are for information purposes only and do not constitute individual advice. All information is based on our current understanding of taxation legislation and regulations. The Financial Conduct Authority does not regulate estate planning, tax advice, wills or trusts.Back to News & Views