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Hello and welcome to A Little Bit Richer, with me, Iona Bain, brought to you by Legal &; General. Now today we're focusing on tax, something that gets taken before you're paid, so we don't think about it too often, but maybe you've seen videos online or heard stuff from friends about ways you can reduce the amount of money the HMRC gets from you. And you might be wondering, is that
complicated? What's the catch? Where do I start? Well, we've enlisted someone who is definitely going to help us understand this whole area, and that is tax advisor Tim Paul. He's actually joining us for a special two- part episode. Tim is a certified accountant, social media finance content creator, and is the co- founder of his own accountancy practice, so I think he knows a thing or two about
tax. He's going to enlighten us on ways you can reduce the tax you pay while improving your longer- term finances all in a way that is perfectly legal. This is going to be an interesting one. Welcome, Tim.
Thank you. I love that intro. It makes me sound really qualified. Great.
Well, you've got a lot to live up to now.
Exactly.
Can you just give us a very brief overview of how salaries are taxed in the UK, what the different tax thresholds and tax bands are? Just talk us through it.
In the UK, we run on a marginal tax system, which, the more you earn, the more you get taxed. Right at the start, you've got your 12,570 pounds in tax- free income that you can earn each year. Up to this threshold, you won't pay any income tax or national insurance. Then you've got from 12,570 pounds or up to 50, 000 pounds, roughly speaking, you pay 20% income tax and you'll pay 8% national insurance. Then
above that 50, 000 pound threshold, it's actually 50, 270 pounds. You then start to pay 40% income tax, which is obviously the big jump, and you then pay an additional 2% in national insurance. So it's essentially, for every pound that you earn above 50,000, assume 42 pence goes straight to
HMRC, the rest comes to you. And then there's an additional rate tax band which not a lot of people end up getting to, but if you do earn high, then you've got 125, 000 pounds and 140 pence. When you earn above that, you then go to the additional rate band, which is 45% tax, but at that point you're still not paying any more national insurance. That's essentially how
the main two taxes work. The additional layer to that is if you've gone to university, of course, and you have a student loan to repay, it gets a whole lot worse for you, unfortunately. I am one of those
people. For my band, there's different repayment plans, and the way it works is once you earn above a certain threshold, say it's 25, 000, you then start to repay 9% of everything that you earn above that threshold, again, back to HMRC. So it adds a lot of additional tax on, but that's roughly speaking how everything works.
Some would say that's quite a brutal system in so far as if you then tip over into a new tax band, then suddenly the amount of tax you're paying is a lot more. That's why people are looking for those ways to legally reduce what tax they pay. Can you talk us through why salary sacrifice could be one of those tools available?
Yeah. Salary sacrifice, as it sounds, it's exactly that: you're sacrificing a portion of your salary in return for a non- cash benefit through your employer. Let's say I earn 40,000 pounds per year. I can then reduce the amount that I earn by a specific amount in order to get a non- cash benefit, which could be a gym membership, it could be
private healthcare, a company car, even, cycling to work. You can get that all through your employer, and then it reduces the amount in tax that you pay because it reduces your income before the tax is deducted on your payslip. So I would then, say, have a 2, 000- pound non- cash benefit for the year, which would reduce my taxable salary to 38,000 pounds, and therefore I'm then paying less tax on that 38, 000 pounds.
Salary sacrifice definitely sounds really intriguing. What does it actually look like in practice?
Let's say you want to take more holiday days. You buy more holiday from your employer. You can do that through salary sacrifice. If you want subscriptions to buy a travel card, imagine you're able to do those things before you pay tax so that you're essentially saving money on your payslip because you're paying less income tax, not your
insurance. So anything from gym memberships, private healthcare, subscription fees, electronic devices, it can all go through salary sacrifice and it reduces taxable income, and therefore the less tax you will pay on it.
A lot of things that people will be paying for anyway from their post- tax income, maybe they could get that actually done at source, which would be much better for them. How can somebody find out what is available from their employer in terms of salary sacrifice?
Well, you have to go directly to your employer and ask if they're willing to enroll you, which, I don't see why they wouldn't.
Yeah, talk to your boss. See what they say.
Exactly.
It sounds like a great thing, but I'm not going to lie, salary sacrifice hasn't got the best brand. Those are two words that you don't want to hear together because people want to earn as much as they can, but are there circumstances actually in which going for that could actually leave you better off because of the tax implications?
Yeah, definitely. As we mentioned before that when you go into the higher tax bracket, when you're going above the 50k mark, that's when it could become very beneficial, because rather than getting taxed 40% on that amount, you earn
above. If you only earn, say, 53, 54, 55,000 pounds, you can then do a salary sacrifice to bring that income back down to 50, and then with that additional, you're then getting benefits from your employer, which can obviously benefit your lifestyle day to day. So it's probably potentially a better way to go about it. You're being more tax- efficient with your income. That's probably the key point.
Are you seeing more people looking at salary sacrifice and seeing it as a valuable benefit that can be offered by some employers, or is it a little bit under the radar?
I would say it's very under the radar. I wish more people knew about it. Maybe they could have named it something a bit more interesting, a salary benefit scheme or something like that, but people also maybe just don't really understand it, because they might assume that, " Well, it just means I'm earning less money," but in actual fact, if you think about it, you could be paying less tax and overall be better off.
Salary benefit, I like that. If anyone else has suggestions, answers on a postcard, we want to hear them. What about using your pension to reduce your take- home pay? How would that work?
With your pension, it works in a similar way to the salary sacrifice scheme. Once you're 22 or older or working full time, you'll be automatically enrolled into a workplace pension. And then every time you contribute to it, every penny that goes in, it gets taken off of your
growth salary before tax gets deducted. Again, it reduces your taxable salary, soyou're paying less income tax and national insurance, and of course, that money then goes tax- free into your pension pot, your employer adds to it, and then obviously you put that towards your retirement, it reduces the amount of tax you pay now and it obviously benefits you later in life.
It's probably the key lever, I would say, for any young person, 30s, 40s, whatever age you are, or if you're about to go into a higher tax bracket, if you've got a big bonus coming one off that might push you into a higher tax bracket, then just putting a bit more into your pension, even if it's an extra few percent, it's going to make a difference in how much
tax you pay. Of course, the big difference is how much will then eventually get added by your employer, and then it compounds because it gets invested over time, and then you retire hopefully with a nice pot and you can be more comfortable and not have to rely on your kids to look after you.
Yeah. None of us want that. It's one of those rare instances where it's actually a win- win. Doing what's right for you in the long term can actually benefit you in the here and now. How well- informed are we
when it comes to tax? Because I can say quite honestly, I've been a financial journalist for nearly 15 years, tax is one of these subjects that I still don't really love writing and talking about, partly because it can get really, really confusing. What are the most common misconceptions that you hear about when it comes to tax?
The most common misconception is thinking that your payslip is viable and it's correct. Of course, HMRC does make mistakes. I actually had a mistake of mine when I first started my employment. I was overpaying my student loan by 60 pounds a month.
How long had that been going on?
I caught it early. I caught it within I think three months, but over a course of a year, that's-
That would add up.
... hundreds and hundreds of pounds that you're losing, that you shouldn't be. But it's good to check because often people don't realize that they are not reclaiming money that they could be. The other one is a lot of people for whatever reason seem to think that when they go into a high tax bracket, it means that they're
going to be taking home less income. With the 50, 000- pound bracket, when you then go to 40% tax, a lot of people seem to think that, oh, well, because I'm now getting taxed on 40%, I'm actually worse off, but the reality is you're never worse off because the threshold means that you only pay the 40% on what you earn above that amount. So people do get very confused about that. You just have to remember it's a
marginal system. Getting a pay rise is never a bad thing. Never say no to a pay rise, essentially, is the advice that I would give. But, yeah, that's one thing that I've seen a lot of people get confused about. In general, I just think that people care about how much they earn post- tax. They never really think about what they're paying on their payslips, really, because it doesn't
get talked about and it's not interesting. No one wants to sit there and think about the money that they're losing to HMRC every single month. So I think it's just about awareness and making sure that people understand the importance of knowing it early because unclaimed tax for years and years is really going to be putting you in
a worse position. Pensions, again, another one putting you in a worse position if you just don't think about it. The key is to make sure that you're reading up and then taking action.
There may be people thinking, is this stuff that I'm allowed to do? Because when we talk about tax, sometimes we get a bit uncomfortable. People think, sounds a little bit like tax avoidance. Just talk us through how legal all this is.
Completely legal. I think with the salary sacrifice, some people might think that, oh, my employer might not want to do that or might not be willing to or they can't, but it's actually in your employer's best interest as well, because by going through salary sacrifice, they're actually reducing their national insurance contributions, because employees make national insurance contributions,
but employers do at the same time as well. So it's in the best interest of both because they both will reduce the amount of national insurance they pay, and instead that money will go towards actually helping the employees with whatever it is that they want to do. It is a win- win and, like I said, completely legal.
And when it comes to pensions, that's something that the government wants us to save more for because that reduces state dependency later on.
Yes. Exactly.
Are there times where people need to be a bit more careful about reducing their take- home pay?
Yeah. There'll be one instance where if you're looking to apply for a mortgage in the near future, you just want to make sure that you're not reducing your income by a significant amount whereby it could impact what lenders call accessibility of affordability, so essentially is really about speaking to your mortgage broker, making sure that they're aware that you're claiming whatever
benefits you are through salary sacrifice and making sure that it doesn't impact your affordability when you come to do the mortgage application. But again, we're talking about it would only really have an impact if we're looking at maybe upwards of 5, 6, 7, 000 pounds that you're sacrificing in salary. Then it could start to have a bit of an impact on your mortgage application. The other one
would be your national insurance contributions. To get your state pension, you obviously need 35 years of qualifying national insurance contributions. If you're increasing your salary sacrifice and then reducing your income, then you could potentially fall below that threshold, but that threshold is only about 6, 400 pounds a year. Most people will be significantly above that, anyway, but just one other thing to consider.
If someone is about to approach one of these tax thresholds, is there a checklist that they can go through in terms of what they should be thinking about?
The key thing is to understand what's going on in your payslip. What does your tax code say? Does that correspond to what it should say? These are the things to check. And then if you're getting closer to a higher tax bracket, once you've obviously done the initial check, then it's a case of thinking about salary sacrifice, how much you contribute to a pension, and those kinds of things.
All really, really good tips, Tim. Thank you very much.
You're welcome.
That's all for part one. Next time, we'll be talking through tax on side hustles, rental income and personal savings allowances, and we'll also cover tax- free childcare and have some quick wins to make sure you're not paying any more tax than you need to. This podcast is brought to you by L&; G. You can keep up with the
show on YouTube, TikTok and Instagram, @ legalandgeneral. If you have a question or a topic that you would like answered on the show, then please do get in touch on our socials. We would absolutely love to hear from you. Until next time, see you soon.