16 April 2024
Keith Brooks, financial planner at wealth manager RBC Brewin Dolphin
With the start of a new tax year, it’s time to look at your tax affairs and whether you are paying an appropriate amount in line with your earnings – particularly with even more changes introduced following last year’s Scottish Budget. It saw the introduction of a new ‘advanced’ rate for those earning between £75,001 and £125,140, as well as freezes to some thresholds, dragging more people into paying higher rates of tax.
On the face of it, you might think the highest rate of income tax in Scotland is 48% for those earning more than £125,140 per year. However, the reality is that for anyone with earnings between £100,000 and £125,140 their effective tax rate is 70% – 69.5% to be exact – on this portion of their income, including National Insurance contributions, meaning they keep just 30p in every £1 earned.
The reason for this is the way the tax-free personal allowance is treated. Most people have a standard personal allowance of £12,570 – the amount of income you are allowed to earn before paying tax each year. If you have a standard personal allowance, the tax rates you pay for each band of earnings are: 0% on income up to £12,570, 19% to £14,876, 20% to £26,561, 21% to 43,662, 42% to £75,000, 45% to £125,140, and 48% from £125,140.
Once you earn more than £100,000, your tax-free personal allowance starts to be tapered, reducing by £1 for every £2 that your income exceeds £100,000. If your income is £125,140 or more, you end up with no tax-free personal allowance. The result of this means a Scottish taxpayer earning between these two figures faces an effective rate of 70% on that £25,140 of income.
For someone earning £110,000, you would not only pay £4,500 in advanced rate tax on the top £10,000 of your income, you would also lose £5,000 of your personal allowance. And, with £5,000 of your personal allowance gone, that portion of your income is now also subject to tax at 45%, costing you another £2,250. When you factor in national insurance at 2% it leaves just £3,050 from that original £10,000, giving an effective tax rate of 70%
Saving into a pension is one of the most straightforward ways of mitigating against this tax trap. If you earn £110,000 and make a gross contribution of £10,000, your adjusted net income would fall to £100,000. Doing this would reinstate your full personal allowance and provide an effective rate of tax relief of 69.5% on your pension contribution, while also boosting your pension pot for the long term through the power of compounded returns.
However, bear in mind that there is a cap on the amount you and your employer can pay into your pension each year and still receive tax relief. For most people, the pension annual allowance is 100% of your UK earnings or £60,000, whichever is lower. This might be tapered if your adjusted income exceeds £260,000.
If you exceed your annual allowance, you’ll have to pay an annual allowance charge, which essentially claws back any tax relief received on the excess contribution. If you aren’t sure how much your annual allowance is, or you’re concerned about exceeding it, speak to a financial or tax adviser.
– ENDS –
Disclaimers
The value of investments can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Opinions expressed in this publication are not necessarily the views held throughout RBC Brewin Dolphin Ltd.
RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444) and regulated in Jersey by the Financial Services Commission. Registered Office; 12 Smithfield Street, London, EC1A 9BD. Registered in England and Wales company number: 2135876.
| Scottish tax bands: | ||
| Band | Taxable Income | Tax Rate |
| Personal Allowance | Up to £12,570 | 0% |
| Starter Rate | £12,571 to £14,876 | 19% |
| Basic Rate | £14,877 to £26,561 | 20% |
| Intermediate Rate | £26,562 to £43,662 | 21% |
| Higher Rate | £43,663 to £75,000 | 42% |
| Advanced Rate | £75,001 to £125,140 | 45% |
| Top Rate | Above £125,140 | 48% |
PRESS INFORMATION
For further information, please contact:
Peter McFarlane peter.mcfarlane@framecreates.co.uk / 07412 739 093
Richard Janes richard.janes@brewin.co.uk / Tel: +44 (0) 20 3201 3343
NOTES TO EDITORS
About RBC Brewin Dolphin
RBC Brewin Dolphin is one of the UK and Ireland’s leading wealth managers and traces its origins back to 1762. With £51.8* billion in assets under management, we offer award-winning, personalised wealth management services from bespoke, discretionary investment management to retirement planning and tax-efficient investing.
Our qualified investment managers and financial planners are based in 33 offices across the UK, Jersey and Republic of Ireland. They are committed to the most exacting standards of client service, with long-term thinking and absolute focus on our clients’ needs at the core.
As part of Royal Bank of Canada (RBC), we are now able to draw on the strength of a global financial institution to continue to improve the service we provide to our clients and drive further innovation across our business.
*as at 31st October 2023.
The value of investments can fall and you may get back less than you invested.
RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444) and regulated in Jersey by the Financial Services Commission. Registered Office; 12 Smithfield Street, London, EC1A 9BD. Registered in England and Wales company number: 2135876.
About RBC
Royal Bank of Canada is a global financial institution with a purpose-driven, principles-led approach to delivering leading performance. Our success comes from the 94,000+ employees who leverage their imaginations and insights to bring our vision, values and strategy to life so we can help our clients thrive and communities prosper. As Canada’s biggest bank and one of the largest in the world, based on market capitalization, we have a diversified business model with a focus on innovation and providing exceptional experiences to our more than 17 million clients in Canada, the U.S. and 27 other countries. Learn more at rbc.com.
We are proud to support a broad range of community initiatives through donations, community investments and employee volunteer activities. See how at rbc.com/community-social-impact.