WEBVTT - Get More From Your Salary: Navigating Tax. Part One 0:00:00.330 --> 0:00:02.940 This series is brought to you by L& G, helping 0:00:02.940 --> 0:00:04.980 you build a future that's a little bit richer. 0:00:06.120 --> 0:00:08.789 Hello and welcome to A Little Bit Richer, with me, 0:00:08.789 --> 0:00:12.450 Iona Bain, brought to you by Legal & General. Now today 0:00:12.450 --> 0:00:16.140 we're focusing on tax, something that gets taken before you're 0:00:16.140 --> 0:00:19.290 paid, so we don't think about it too often, but 0:00:19.320 --> 0:00:22.079 maybe you've seen videos online or heard stuff from friends 0:00:22.290 --> 0:00:25.200 about ways you can reduce the amount of money the HMRC 0:00:25.200 --> 0:00:27.900 gets from you. And you might be wondering, is that 0:00:27.930 --> 0:00:32.850 complicated? What's the catch? Where do I start? Well, we've 0:00:32.850 --> 0:00:36.090 enlisted someone who is definitely going to help us understand 0:00:36.090 --> 0:00:39.030 this whole area, and that is tax advisor Tim Paul. 0:00:39.240 --> 0:00:42.090 He's actually joining us for a special two- part episode. 0:00:42.390 --> 0:00:46.380 Tim is a certified accountant, social media finance content creator, 0:00:46.650 --> 0:00:49.739 and is the co- founder of his own accountancy practice, 0:00:49.950 --> 0:00:52.290 so I think he knows a thing or two about 0:00:52.290 --> 0:00:55.260 tax. He's going to enlighten us on ways you can 0:00:55.260 --> 0:00:58.350 reduce the tax you pay while improving your longer- term 0:00:58.350 --> 0:01:02.190 finances all in a way that is perfectly legal. This is 0:01:02.190 --> 0:01:05.250 going to be an interesting one. Welcome, Tim. 0:01:05.250 --> 0:01:07.229 Thank you. I love that intro. It makes me sound 0:01:07.440 --> 0:01:08.160 really qualified. Great. 0:01:09.180 --> 0:01:10.500 Well, you've got a lot to live up to now. 0:01:11.040 --> 0:01:11.400 Exactly. 0:01:12.270 --> 0:01:15.300 Can you just give us a very brief overview of 0:01:15.420 --> 0:01:19.290 how salaries are taxed in the UK, what the different 0:01:19.290 --> 0:01:22.500 tax thresholds and tax bands are? Just talk us through it. 0:01:23.370 --> 0:01:26.039 In the UK, we run on a marginal tax system, 0:01:26.040 --> 0:01:29.729 which, the more you earn, the more you get taxed. Right at the start, 0:01:29.910 --> 0:01:34.200 you've got your 12,570 pounds in tax- free income that you can earn 0:01:34.200 --> 0:01:36.900 each year. Up to this threshold, you won't pay any 0:01:36.990 --> 0:01:40.950 income tax or national insurance. Then you've got from 12,570 0:01:40.950 --> 0:01:44.670 pounds or up to 50, 000 pounds, roughly speaking, you pay 0:01:44.670 --> 0:01:49.320 20% income tax and you'll pay 8% national insurance. Then 0:01:49.590 --> 0:01:54.120 above that 50, 000 pound threshold, it's actually 50, 270 pounds. You 0:01:54.120 --> 0:01:57.030 then start to pay 40% income tax, which is obviously 0:01:57.090 --> 0:01:59.370 the big jump, and you then pay an additional 2% 0:01:59.640 --> 0:02:02.490 in national insurance. So it's essentially, for every pound that 0:02:02.490 --> 0:02:06.630 you earn above 50,000, assume 42 pence goes straight to 0:02:06.630 --> 0:02:09.510 HMRC, the rest comes to you. And then there's an 0:02:09.510 --> 0:02:12.180 additional rate tax band which not a lot of people 0:02:12.180 --> 0:02:14.369 end up getting to, but if you do earn high, 0:02:14.580 --> 0:02:18.570 then you've got 125, 000 pounds and 140 pence. When you 0:02:18.570 --> 0:02:20.460 earn above that, you then go to the additional rate 0:02:20.460 --> 0:02:23.370 band, which is 45% tax, but at that point you're 0:02:23.370 --> 0:02:26.880 still not paying any more national insurance. That's essentially how 0:02:27.030 --> 0:02:29.940 the main two taxes work. The additional layer to that 0:02:29.940 --> 0:02:32.220 is if you've gone to university, of course, and you 0:02:32.220 --> 0:02:34.410 have a student loan to repay, it gets a whole 0:02:34.410 --> 0:02:36.810 lot worse for you, unfortunately. I am one of those 0:02:36.810 --> 0:02:40.950 people. For my band, there's different repayment plans, and the 0:02:40.950 --> 0:02:42.660 way it works is once you earn above a certain 0:02:42.660 --> 0:02:46.050 threshold, say it's 25, 000, you then start to repay 9% 0:02:46.470 --> 0:02:49.950 of everything that you earn above that threshold, again, back 0:02:49.950 --> 0:02:53.609 to HMRC. So it adds a lot of additional tax 0:02:53.610 --> 0:02:56.760 on, but that's roughly speaking how everything works. 0:02:57.180 --> 0:02:59.610 Some would say that's quite a brutal system in so 0:02:59.610 --> 0:03:03.510 far as if you then tip over into a new tax band, 0:03:03.750 --> 0:03:05.850 then suddenly the amount of tax you're paying is a 0:03:05.850 --> 0:03:09.510 lot more. That's why people are looking for those ways 0:03:09.510 --> 0:03:13.380 to legally reduce what tax they pay. Can you talk 0:03:13.380 --> 0:03:15.810 us through why salary sacrifice could be one of those 0:03:15.810 --> 0:03:16.739 tools available? 0:03:16.919 --> 0:03:21.720 Yeah. Salary sacrifice, as it sounds, it's exactly that: you're sacrificing a 0:03:21.720 --> 0:03:24.930 portion of your salary in return for a non- cash 0:03:24.930 --> 0:03:30.060 benefit through your employer. Let's say I earn 40,000 pounds 0:03:30.060 --> 0:03:33.630 per year. I can then reduce the amount that I earn by 0:03:34.860 --> 0:03:37.500 a specific amount in order to get a non- cash 0:03:37.500 --> 0:03:40.380 benefit, which could be a gym membership, it could be 0:03:40.470 --> 0:03:44.430 private healthcare, a company car, even, cycling to work. You 0:03:44.430 --> 0:03:45.810 can get that all through your employer, and then it 0:03:45.810 --> 0:03:48.660 reduces the amount in tax that you pay because it 0:03:48.660 --> 0:03:51.990 reduces your income before the tax is deducted on your 0:03:51.990 --> 0:03:56.070 payslip. So I would then, say, have a 2, 000- pound non- cash 0:03:56.070 --> 0:03:58.800 benefit for the year, which would reduce my taxable salary 0:03:58.800 --> 0:04:02.460 to 38,000 pounds, and therefore I'm then paying less tax 0:04:02.490 --> 0:04:04.110 on that 38, 000 pounds. 0:04:05.070 --> 0:04:09.060 Salary sacrifice definitely sounds really intriguing. What does it actually 0:04:09.060 --> 0:04:10.140 look like in practice? 0:04:11.040 --> 0:04:14.460 Let's say you want to take more holiday days. You 0:04:14.460 --> 0:04:16.830 buy more holiday from your employer. You can do that 0:04:16.830 --> 0:04:20.700 through salary sacrifice. If you want subscriptions to buy a 0:04:20.700 --> 0:04:24.570 travel card, imagine you're able to do those things before 0:04:24.630 --> 0:04:27.539 you pay tax so that you're essentially saving money on 0:04:27.540 --> 0:04:29.850 your payslip because you're paying less income tax, not your 0:04:29.850 --> 0:04:35.370 insurance. So anything from gym memberships, private healthcare, subscription fees, 0:04:35.700 --> 0:04:39.510 electronic devices, it can all go through salary sacrifice and 0:04:39.510 --> 0:04:42.299 it reduces taxable income, and therefore the less tax you 0:04:42.300 --> 0:04:42.839 will pay on it. 0:04:43.470 --> 0:04:45.330 A lot of things that people will be paying for 0:04:45.330 --> 0:04:49.350 anyway from their post- tax income, maybe they could get 0:04:49.350 --> 0:04:51.659 that actually done at source, which would be much better 0:04:51.660 --> 0:04:55.589 for them. How can somebody find out what is available 0:04:55.589 --> 0:04:57.930 from their employer in terms of salary sacrifice? 0:04:58.080 --> 0:05:00.210 Well, you have to go directly to your employer and 0:05:00.210 --> 0:05:03.419 ask if they're willing to enroll you, which, I don't 0:05:03.420 --> 0:05:03.930 see why they wouldn't. 0:05:04.080 --> 0:05:05.910 Yeah, talk to your boss. See what they say. 0:05:05.970 --> 0:05:06.450 Exactly. 0:05:07.050 --> 0:05:09.390 It sounds like a great thing, but I'm not going 0:05:09.390 --> 0:05:13.650 to lie, salary sacrifice hasn't got the best brand. Those 0:05:13.650 --> 0:05:15.480 are two words that you don't want to hear together 0:05:15.540 --> 0:05:17.159 because people want to earn as much as they can, 0:05:17.820 --> 0:05:21.270 but are there circumstances actually in which going for that 0:05:21.600 --> 0:05:25.740 could actually leave you better off because of the tax implications? 0:05:25.800 --> 0:05:29.339 Yeah, definitely. As we mentioned before that when you go 0:05:29.339 --> 0:05:31.710 into the higher tax bracket, when you're going above the 0:05:31.710 --> 0:05:35.610 50k mark, that's when it could become very beneficial, because 0:05:35.820 --> 0:05:39.089 rather than getting taxed 40% on that amount, you earn 0:05:39.089 --> 0:05:43.680 above. If you only earn, say, 53, 54, 55,000 pounds, you can 0:05:43.680 --> 0:05:46.620 then do a salary sacrifice to bring that income back 0:05:46.620 --> 0:05:49.500 down to 50, and then with that additional, you're then getting 0:05:49.500 --> 0:05:53.219 benefits from your employer, which can obviously benefit your lifestyle 0:05:53.520 --> 0:05:57.060 day to day. So it's probably potentially a better way 0:05:57.060 --> 0:06:01.170 to go about it. You're being more tax- efficient with your income. That's 0:06:01.170 --> 0:06:02.039 probably the key point. 0:06:02.040 --> 0:06:05.820 Are you seeing more people looking at salary sacrifice and 0:06:05.820 --> 0:06:08.760 seeing it as a valuable benefit that can be offered 0:06:08.760 --> 0:06:11.370 by some employers, or is it a little bit under the radar? 0:06:11.430 --> 0:06:13.110 I would say it's very under the radar. I wish 0:06:13.110 --> 0:06:15.390 more people knew about it. Maybe they could have named 0:06:15.390 --> 0:06:18.150 it something a bit more interesting, a salary benefit scheme 0:06:18.150 --> 0:06:20.940 or something like that, but people also maybe just don't 0:06:20.940 --> 0:06:23.700 really understand it, because they might assume that, " Well, it 0:06:23.700 --> 0:06:26.490 just means I'm earning less money," but in actual fact, 0:06:26.670 --> 0:06:28.800 if you think about it, you could be paying less 0:06:28.800 --> 0:06:30.930 tax and overall be better off. 0:06:31.260 --> 0:06:34.170 Salary benefit, I like that. If anyone else has suggestions, 0:06:34.170 --> 0:06:36.659 answers on a postcard, we want to hear them. What 0:06:36.660 --> 0:06:40.650 about using your pension to reduce your take- home pay? 0:06:40.650 --> 0:06:41.700 How would that work? 0:06:42.540 --> 0:06:45.900 With your pension, it works in a similar way to 0:06:45.900 --> 0:06:49.739 the salary sacrifice scheme. Once you're 22 or older or 0:06:49.740 --> 0:06:52.529 working full time, you'll be automatically enrolled into a workplace 0:06:52.529 --> 0:06:56.670 pension. And then every time you contribute to it, every 0:06:56.670 --> 0:06:59.250 penny that goes in, it gets taken off of your 0:06:59.250 --> 0:07:02.790 growth salary before tax gets deducted. Again, it reduces your 0:07:02.790 --> 0:07:06.150 taxable salary, soyou're paying less income tax and national insurance, and 0:07:06.150 --> 0:07:08.400 of course, that money then goes tax- free into your 0:07:08.400 --> 0:07:11.340 pension pot, your employer adds to it, and then obviously 0:07:11.340 --> 0:07:13.890 you put that towards your retirement, it reduces the amount of tax you 0:07:13.890 --> 0:07:16.620 pay now and it obviously benefits you later in life. 0:07:17.010 --> 0:07:19.110 It's probably the key lever, I would say, for any 0:07:19.110 --> 0:07:23.160 young person, 30s, 40s, whatever age you are, or if you're 0:07:23.160 --> 0:07:25.950 about to go into a higher tax bracket, if you've got 0:07:25.950 --> 0:07:28.290 a big bonus coming one off that might push you 0:07:28.290 --> 0:07:30.750 into a higher tax bracket, then just putting a bit 0:07:30.750 --> 0:07:32.760 more into your pension, even if it's an extra few 0:07:32.760 --> 0:07:35.550 percent, it's going to make a difference in how much 0:07:35.550 --> 0:07:38.010 tax you pay. Of course, the big difference is how 0:07:38.010 --> 0:07:41.100 much will then eventually get added by your employer, and 0:07:41.100 --> 0:07:43.650 then it compounds because it gets invested over time, and 0:07:43.650 --> 0:07:46.620 then you retire hopefully with a nice pot and you 0:07:46.620 --> 0:07:48.150 can be more comfortable and not have to rely on 0:07:48.150 --> 0:07:49.140 your kids to look after you. 0:07:49.140 --> 0:07:52.320 Yeah. None of us want that. It's one of those rare 0:07:52.320 --> 0:07:55.320 instances where it's actually a win- win. Doing what's right 0:07:55.320 --> 0:07:57.330 for you in the long term can actually benefit you 0:07:57.330 --> 0:08:01.470 in the here and now. How well- informed are we 0:08:01.500 --> 0:08:03.990 when it comes to tax? Because I can say quite 0:08:03.990 --> 0:08:07.080 honestly, I've been a financial journalist for nearly 15 years, 0:08:07.350 --> 0:08:09.360 tax is one of these subjects that I still don't 0:08:09.360 --> 0:08:12.690 really love writing and talking about, partly because it can 0:08:12.690 --> 0:08:17.130 get really, really confusing. What are the most common misconceptions 0:08:17.130 --> 0:08:19.110 that you hear about when it comes to tax? 0:08:19.410 --> 0:08:24.300 The most common misconception is thinking that your payslip is 0:08:24.300 --> 0:08:28.110 viable and it's correct. Of course, HMRC does make mistakes. 0:08:28.170 --> 0:08:30.239 I actually had a mistake of mine when I first 0:08:30.240 --> 0:08:32.760 started my employment. I was overpaying my student loan by 0:08:32.760 --> 0:08:33.900 60 pounds a month. 0:08:34.679 --> 0:08:35.040 How long had that been going on? 0:08:35.730 --> 0:08:37.380 I caught it early. I caught it within I think 0:08:37.380 --> 0:08:39.121 three months, but over a course of a year, that's- 0:08:39.121 --> 0:08:40.050 That would add up. 0:08:40.051 --> 0:08:43.110 ... hundreds and hundreds of pounds that you're losing, that 0:08:43.110 --> 0:08:46.230 you shouldn't be. But it's good to check because often 0:08:46.230 --> 0:08:48.990 people don't realize that they are not reclaiming money that 0:08:48.990 --> 0:08:51.719 they could be. The other one is a lot of 0:08:51.720 --> 0:08:53.429 people for whatever reason seem to think that when they 0:08:53.429 --> 0:08:55.559 go into a high tax bracket, it means that they're 0:08:55.559 --> 0:08:58.740 going to be taking home less income. With the 50, 000- 0:08:58.740 --> 0:09:01.650 pound bracket, when you then go to 40% tax, a 0:09:01.650 --> 0:09:03.179 lot of people seem to think that, oh, well, because 0:09:03.179 --> 0:09:06.390 I'm now getting taxed on 40%, I'm actually worse off, 0:09:06.390 --> 0:09:09.420 but the reality is you're never worse off because the 0:09:09.420 --> 0:09:11.820 threshold means that you only pay the 40% on what 0:09:11.820 --> 0:09:14.790 you earn above that amount. So people do get very 0:09:14.790 --> 0:09:17.010 confused about that. You just have to remember it's a 0:09:17.010 --> 0:09:19.950 marginal system. Getting a pay rise is never a bad 0:09:19.950 --> 0:09:23.130 thing. Never say no to a pay rise, essentially, is the 0:09:23.130 --> 0:09:25.020 advice that I would give. But, yeah, that's one thing 0:09:25.020 --> 0:09:27.030 that I've seen a lot of people get confused about. 0:09:28.140 --> 0:09:30.570 In general, I just think that people care about how 0:09:30.570 --> 0:09:33.570 much they earn post- tax. They never really think about 0:09:33.600 --> 0:09:37.080 what they're paying on their payslips, really, because it doesn't 0:09:37.080 --> 0:09:39.540 get talked about and it's not interesting. No one wants 0:09:39.540 --> 0:09:41.760 to sit there and think about the money that they're 0:09:41.760 --> 0:09:45.390 losing to HMRC every single month. So I think it's 0:09:45.390 --> 0:09:48.840 just about awareness and making sure that people understand the 0:09:48.840 --> 0:09:52.710 importance of knowing it early because unclaimed tax for years 0:09:52.710 --> 0:09:55.109 and years is really going to be putting you in 0:09:55.110 --> 0:09:58.290 a worse position. Pensions, again, another one putting you in 0:09:58.290 --> 0:09:59.910 a worse position if you just don't think about it. 0:10:00.600 --> 0:10:02.970 The key is to make sure that you're reading up 0:10:02.970 --> 0:10:04.260 and then taking action. 0:10:04.830 --> 0:10:07.229 There may be people thinking, is this stuff that I'm 0:10:07.230 --> 0:10:10.170 allowed to do? Because when we talk about tax, sometimes 0:10:10.170 --> 0:10:13.140 we get a bit uncomfortable. People think, sounds a little 0:10:13.140 --> 0:10:16.559 bit like tax avoidance. Just talk us through how legal 0:10:16.559 --> 0:10:17.220 all this is. 0:10:17.340 --> 0:10:20.880 Completely legal. I think with the salary sacrifice, some people 0:10:20.880 --> 0:10:22.980 might think that, oh, my employer might not want to 0:10:22.980 --> 0:10:24.599 do that or might not be willing to or they 0:10:24.600 --> 0:10:27.270 can't, but it's actually in your employer's best interest as 0:10:27.270 --> 0:10:31.500 well, because by going through salary sacrifice, they're actually reducing 0:10:31.500 --> 0:10:35.640 their national insurance contributions, because employees make national insurance contributions, 0:10:35.640 --> 0:10:37.860 but employers do at the same time as well. So 0:10:37.980 --> 0:10:40.589 it's in the best interest of both because they both 0:10:40.590 --> 0:10:42.809 will reduce the amount of national insurance they pay, and 0:10:42.809 --> 0:10:46.200 instead that money will go towards actually helping the employees 0:10:46.200 --> 0:10:48.090 with whatever it is that they want to do. It is 0:10:48.330 --> 0:10:50.579 a win- win and, like I said, completely legal. 0:10:51.030 --> 0:10:52.740 And when it comes to pensions, that's something that the 0:10:52.740 --> 0:10:55.290 government wants us to save more for because that reduces 0:10:55.290 --> 0:10:56.939 state dependency later on. 0:10:56.940 --> 0:10:57.480 Yes. Exactly. 0:10:57.990 --> 0:10:59.849 Are there times where people need to be a bit 0:10:59.850 --> 0:11:02.370 more careful about reducing their take- home pay? 0:11:02.820 --> 0:11:07.470 Yeah. There'll be one instance where if you're looking to apply 0:11:07.470 --> 0:11:10.470 for a mortgage in the near future, you just want to make 0:11:10.470 --> 0:11:15.090 sure that you're not reducing your income by a significant 0:11:15.090 --> 0:11:19.080 amount whereby it could impact what lenders call accessibility of 0:11:19.080 --> 0:11:23.160 affordability, so essentially is really about speaking to your mortgage 0:11:23.160 --> 0:11:25.920 broker, making sure that they're aware that you're claiming whatever 0:11:25.920 --> 0:11:28.980 benefits you are through salary sacrifice and making sure that 0:11:28.980 --> 0:11:31.440 it doesn't impact your affordability when you come to do 0:11:31.440 --> 0:11:34.800 the mortgage application. But again, we're talking about it would 0:11:34.800 --> 0:11:37.260 only really have an impact if we're looking at maybe 0:11:37.350 --> 0:11:40.530 upwards of 5, 6, 7, 000 pounds that you're sacrificing 0:11:40.800 --> 0:11:42.780 in salary. Then it could start to have a bit 0:11:42.780 --> 0:11:45.660 of an impact on your mortgage application. The other one 0:11:45.660 --> 0:11:50.340 would be your national insurance contributions. To get your state 0:11:50.340 --> 0:11:53.819 pension, you obviously need 35 years of qualifying national insurance 0:11:53.820 --> 0:11:58.200 contributions. If you're increasing your salary sacrifice and then reducing 0:11:58.230 --> 0:12:01.829 your income, then you could potentially fall below that threshold, 0:12:02.010 --> 0:12:04.199 but that threshold is only about 6, 400 pounds a 0:12:04.200 --> 0:12:07.679 year. Most people will be significantly above that, anyway, but 0:12:07.950 --> 0:12:09.450 just one other thing to consider. 0:12:10.890 --> 0:12:14.429 If someone is about to approach one of these tax 0:12:14.429 --> 0:12:17.429 thresholds, is there a checklist that they can go through 0:12:17.429 --> 0:12:19.200 in terms of what they should be thinking about? 0:12:19.559 --> 0:12:21.179 The key thing is to understand what's going on in 0:12:21.179 --> 0:12:23.250 your payslip. What does your tax code say? Does that 0:12:23.250 --> 0:12:25.770 correspond to what it should say? These are the things 0:12:25.770 --> 0:12:27.690 to check. And then if you're getting closer to a 0:12:27.690 --> 0:12:30.660 higher tax bracket, once you've obviously done the initial check, 0:12:30.660 --> 0:12:33.479 then it's a case of thinking about salary sacrifice, how 0:12:33.480 --> 0:12:35.970 much you contribute to a pension, and those kinds of things. 0:12:36.120 --> 0:12:38.699 All really, really good tips, Tim. Thank you very much. 0:12:38.700 --> 0:12:38.851 You're welcome. 0:12:38.851 --> 0:12:43.620 That's all for part one. Next time, we'll be talking through 0:12:43.620 --> 0:12:47.939 tax on side hustles, rental income and personal savings allowances, 0:12:47.940 --> 0:12:51.449 and we'll also cover tax- free childcare and have some 0:12:51.450 --> 0:12:54.270 quick wins to make sure you're not paying any more 0:12:54.300 --> 0:12:56.760 tax than you need to. This podcast is brought to 0:12:56.760 --> 0:12:58.830 you by L& G. You can keep up with the 0:12:58.830 --> 0:13:04.349 show on YouTube, TikTok and Instagram, @ legalandgeneral. If you have a 0:13:04.350 --> 0:13:06.870 question or a topic that you would like answered on 0:13:06.870 --> 0:13:09.300 the show, then please do get in touch on our 0:13:09.300 --> 0:13:12.809 socials. We would absolutely love to hear from you. Until 0:13:12.809 --> 0:13:14.340 next time, see you soon.