Income tax may take a ‘big chunk’ out of Britons’ pay from this month – check tax code now

Spring Statement: Sunak announces £5bn income tax cut

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Income tax rates and thresholds will remain unchanged in the new tax year which kick in from April 6, 2022. While on the surface this may appear like good news, there are potential implications to bear in mind.

One expert has described the matter as a potential stealth tax, which may have a big personal effect on Britons.

Adrian Lowery, personal finance expert at Bestinvest, said: “If your salary doesn’t change, your income tax payments will remain the same.

“Although, the purchasing power of your disposable income is falling thanks to inflation.

“However, if you receive a pay rise – whether it’s below, in line with or above inflation – you will pay more tax.”

Income tax rates and bands show how much a person will pay, using a base line of the standard Personal Allowance of £12,570 – the amount of income people do not have to pay tax on.

The basic rate is from £12,571 to £50,270, where people will pay 20 percent tax.

The higher rate band spans £50,271 to £150,000 with a tax rate of 40 percent.

Finally, the 45 percent additional rate is applicable for those who have income over £150,000.

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Mr Lowery warned marginal tax rates will increase if a pay rise takes a person from one tax band to the next.

He continued: “If a pay rise takes you from below £12,570 to above then you will go from paying zero income tax to paying 20 percent on the amount above £12,570. 

“Likewise if you shift from a salary of below £50,270 to above then you will start to pay tax at the higher rate of 40 percent on the amount above that figure.

“The next threshold is at £150,000, where the additional tax rate of 45 percent kicks in.

“But workers who receive a pay rise that takes them above £100,000 will notice a big chunk taken from their monthly pay rise, because the Personal Allowance starts to be withdrawn at this mark, and the effective marginal tax rate works out at a hefty 60 percent.”

Amid the potential implications for income tax, there are some actions that individuals can take.

Perhaps most importantly is checking one’s tax code – a number used by employers and pension providers to work out how much income tax to deduct from pay or pensions.

The most common tax code is 1257L which is currently used for most people who have one job or pension.

If an individual’s code differs from this, they should check why so they do not pay unnecessary tax.

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Paying into a pension can be a good way of protecting wealth against income tax – particularly as contributions attract tax relief at a person’s marginal income tax rate.

Mr Lowery added: “Moreover, if your employer offers a salary sacrifice arrangement for paying into a pension – where you agree a salary cut or waive a bonus in favour of a pension contribution instead – then it is possible for those earning just above a tax threshold to drop a tax band.”

Many people will still be working from home as pandemic restrictions have only recently been lifted.

If an employer does not reimburse a person for their costs, then they may be entitled to claim tax relief directly from HM Revenue and Customs (HMRC).

Finally, a marriage allowance could be particularly useful in terms of income tax.

Mr Lowery explained: “If one partner in a marriage or civil partnership earns less than the personal allowance, and the higher earner is a basic-rate taxpayer, then you can transfer any unused personal allowance from the low-earning partner to the higher. Up to £1,260 can be transferred in 2022-23, potentially saving you up to £250.”

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