A further 1.2 million of us will find our earnings going over the 40% tax threshold as a result of the government’s decision to freeze the higher rate tax threshold, according to figures recently released from the House of Common Library.
Not only that, but those currently in receipt of child benefits could also find themselves losing out in a painful “double whammy”.
However, there is one way to reduce the pain, according to Aegon. Their Head of Pensions, Kate Smith, says that making additional pension contributions could keep many taxpayers below the higher income tax threshold – and keep their child benefits in place.
“By 2026 over 1 million more people will be dragged into the higher rate tax band due to the freezing of tax thresholds at £50,270. This doesn’t only mean that more people will pay more tax, but that families may face a double whammy by also losing out on valuable child benefit as earnings rise.
“In January 2013, the government introduced new tax rules for high earners who receive child benefit. Where an individual or their partner has pre-tax income of more than £50,000 a year, their entitlement to child benefit is impacted by a tax charge. Where pre-tax income is between £50,000 and £60,000 a year, individuals claiming child benefit have to pay part of it back. And if pre-tax income is higher than £60,000 a year, the whole amount has to be repaid to HMRC.
“These ‘High income child benefit’ thresholds have been frozen now for eight years, dragging more people into scope and losing out child benefit payments. There seems little likelihood that the thresholds will be increased while income tax thresholds are frozen.
“With careful tax planning individuals dragged above the thresholds could pay a personal pension contribution large enough to reduce their income to below £50,000 a year,” she concludes. “By doing so, they could receive full child benefit payments and tax relief on their pension contributions…. and so help them to save for later life.”
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