With wage increases attempting to keep pace with the cost of living, and with Income Tax and National Insurance thresholds and allowances currently frozen until 2027-28, many employees may find themselves needing to review their personal tax position.
Higher rate pension relief
Most of your employees will be enrolled in your workplace pension scheme, and depending on how your scheme is set up (see below), they may be missing out on higher rate tax relief on their pensions contributions if their earnings exceed £50,270.
- Salary sacrifice scheme – The pension contribution is deducted from the gross (pre tax) salary, and therefore full tax relief is given at source. In these circumstances, therefore, there is nothing further your employees need to consider.
- Net pay contribution scheme – The pension contribution is deducted from the net pay (post tax). Unless the PAYE code is already adjusted for the tax relief on the pension contribution, an employee earning over £50,270 may be overpaying tax.
As an example, on a salary of £56,000 there would ordinarily be income tax to pay of £9,832 per year. If the employee makes pension contributions of 5% of their salary, being £2,800 (net), their basic rate tax band should be increased by £3,500 (gross), which would reduce their tax liability by £700 per year.
This does not happen automatically, HMRC need to be advised either in writing or through the filing of a tax return. The same applies if your employee makes personal pension contributions outside of auto enrolment and is earning over £50,270.
Charity donations
These work in a similar way to a pension contribution. For example, an £80 donation would be grossed up to £100, and the basic rate tax band is extend by £100. In the same example above, by claiming relief for the £80 charity donation, a higher rate taxpayer can reduce their liability by a further £20.
You must be a taxpayer to tick the gift aid box, otherwise you may find yourself in a position where you owe HMRC money if the gift aid element exceeds your total tax liability.
Child benefit
From April 2024 if your employee’s taxable earnings exceed £60,000 and they claim child benefit, they may need to complete a tax return to repay some or all of child benefit.
The ‘net pay contribution scheme’ mentioned above, as well as charity donations, will reduce your employees’ taxable income for this threshold and should be considered if the high-income benefit charge applies to them.
Interest income
The personal savings allowance is £1,000 for basic rate taxpayers, £500 for higher rate taxpayers, and nil for additional rate taxpayers.
Given the hike in interest rates, a taxable savings pot holding just £10,000, earning an average of 5% gross interest for one year, will mean a higher rate taxpayer has used all of their savings rate band. Therefore, if your employees have savings of more than £10,000 (£20,000 for a basic rate taxpayer) they may need to file a tax return and pay tax on the interest received over and above the allowances.
Other considerations requiring attention
If your employee earns more than £150,000, they will automatically need to submit a tax return.
If your employee holds any shares, the tax-free dividend allowance is now just £500. Any dividends above this amount will be taxable.
The annual exemption for capital gains tax is now just £3,000. Different rules and rates of capital gains tax apply depending on the type of asset being disposed of.
If you or any of your employees think that they may need to review their tax position based on the above, please do get in touch.
