Financial Planning: Beware of the traps!

By Rachel Efetha, Chartered Financial Planner with Anstee & Co.

Do you know your tax rates? 20%, 40%, 45%, 58.2% and 60%? What? 58.2%? 60%? It might surprise you to hear that certain people, earning between £50 – 60,000 jump straight from the basic rate of 20% to the 58.2%% rate! Others will hit it when they earn between £100,000 – £125,140.

The first set of people I am talking about will fall foul of the Child Benefit Tax Trap. Let us imagine you have two children, aged under 18 in full-time education and are in receipt of child benefit at a rate of £1,827.80 and earn £50,000 pa. You will be a basic rate taxpayer on your £50,000.

But let us say that you get a £1,000 bonus, great that is an extra £600 in my pocket after higher rate tax, isn’t it? No, unfortunately not. This is because with earnings over £50,000 you start to lose your child benefit at a rate of 1% for every £100 of income.

So, that £1,000 bonus means that you lose 10% of the child benefit – £182. So, you have paid £400 in Higher rate tax and now you are paying an extra £182 in tax, meaning that you only take home £418 of your bonus. That is an effective tax rate of 58.2%. If you get a £10,000 bonus, then the Child Benefit is wiped out completely.

What can I do about it?

Well, here is the good bit – if you ask your employer to do ‘salary sacrifice’ on your bonus and pay it straight into your pension instead of your salary then you get to keep the whole £1,000 – albeit you must wait a few years until you can access it if you are not already over 55. If your employer is not able to do salary sacrifice, then you can still pay into a pension – just talk to us to help you with it.

As for the second group – earning £100,000 to £125,140 they are caught in a different trap – the personal allowance tax trap – this is because for every £2 you earn over £100,000, you lose £1 of your personal allowance. Imagine you are earning £100,000 and get the same £1,000 bonus. You pay £400 in Higher Rate tax but you also lose £500 of personal allowance which means that £500 of your income that was previously tax-free is now subject to, higher rate tax of £200 – you will only take home £400 of your bonus.

Again, you can claw back all the tax by paying into a pension.

How Anstee & Co can help you with financial planning.

We are a firm of Independent Financial Advisers (IFA’s). This means the financial planning advice we provide is unbiased. So, why not contact us to find out more. The initial meeting is at our expense and is without obligation. Our experience covers all aspects of financial planning, including pensions, estate planning, mortgages and investments.

Our offices are located at-

• Kettering, Northamptonshire
• Stamford, Lincolnshire
• Market Harborough, Leicestershire
• Towcester, Northamptonshire
• London, Greater London

Additionally, we made use of meeting rooms in-

• Northampton
• Bedford
• Lutterworth
• Wellingborough

Also, we make full use of video conferencing facilities such as-

• Zoom
• Microsoft Teams
• Skype
• Facetime

We can also arrange a conference telephone call. There is no need to visit an office as all work can be handled remotely.

So, if you have any thoughts or comments on this article, “Financial Planning: Beware of the traps!”, then we would love to hear your thoughts.

Finally, the information contained in this article is for information purposes only and does not constitute advice. No action should be taken based on this information alone. Anstee & Co. is authorised and regulated by the Financial Conduct Authority (FCA).