Speaker 1: This series is brought to you by L& G, helping
Speaker 1: you build a future that's a little bit richer.
Iona Bain: Hello and welcome to A Little Bit Richer, with me,
Iona Bain: Iona Bain, brought to you by Legal & General. Now today
Iona Bain: we're focusing on tax, something that gets taken before you're
Iona Bain: paid, so we don't think about it too often, but
Iona Bain: maybe you've seen videos online or heard stuff from friends
Iona Bain: about ways you can reduce the amount of money the HMRC
Iona Bain: gets from you. And you might be wondering, is that
Iona Bain: complicated? What's the catch? Where do I start? Well, we've
Iona Bain: enlisted someone who is definitely going to help us understand
Iona Bain: this whole area, and that is tax advisor Tim Paul.
Iona Bain: He's actually joining us for a special two- part episode.
Iona Bain: Tim is a certified accountant, social media finance content creator,
Iona Bain: and is the co- founder of his own accountancy practice,
Iona Bain: so I think he knows a thing or two about
Iona Bain: tax. He's going to enlighten us on ways you can
Iona Bain: reduce the tax you pay while improving your longer- term
Iona Bain: finances all in a way that is perfectly legal. This is
Iona Bain: going to be an interesting one. Welcome, Tim.
Tim Paul: Thank you. I love that intro. It makes me sound
Tim Paul: really qualified. Great.
Iona Bain: Well, you've got a lot to live up to now.
Tim Paul: Exactly.
Iona Bain: Can you just give us a very brief overview of
Iona Bain: how salaries are taxed in the UK, what the different
Iona Bain: tax thresholds and tax bands are? Just talk us through it.
Tim Paul: In the UK, we run on a marginal tax system,
Tim Paul: which, the more you earn, the more you get taxed. Right at the start,
Tim Paul: you've got your 12,570 pounds in tax- free income that you can earn
Tim Paul: each year. Up to this threshold, you won't pay any
Tim Paul: income tax or national insurance. Then you've got from 12,570
Tim Paul: pounds or up to 50, 000 pounds, roughly speaking, you pay
Tim Paul: 20% income tax and you'll pay 8% national insurance. Then
Tim Paul: above that 50, 000 pound threshold, it's actually 50, 270 pounds. You
Tim Paul: then start to pay 40% income tax, which is obviously
Tim Paul: the big jump, and you then pay an additional 2%
Tim Paul: in national insurance. So it's essentially, for every pound that
Tim Paul: you earn above 50,000, assume 42 pence goes straight to
Tim Paul: HMRC, the rest comes to you. And then there's an
Tim Paul: additional rate tax band which not a lot of people
Tim Paul: end up getting to, but if you do earn high,
Tim Paul: then you've got 125, 000 pounds and 140 pence. When you
Tim Paul: earn above that, you then go to the additional rate
Tim Paul: band, which is 45% tax, but at that point you're
Tim Paul: still not paying any more national insurance. That's essentially how
Tim Paul: the main two taxes work. The additional layer to that
Tim Paul: is if you've gone to university, of course, and you
Tim Paul: have a student loan to repay, it gets a whole
Tim Paul: lot worse for you, unfortunately. I am one of those
Tim Paul: people. For my band, there's different repayment plans, and the
Tim Paul: way it works is once you earn above a certain
Tim Paul: threshold, say it's 25, 000, you then start to repay 9%
Tim Paul: of everything that you earn above that threshold, again, back
Tim Paul: to HMRC. So it adds a lot of additional tax
Tim Paul: on, but that's roughly speaking how everything works.
Iona Bain: Some would say that's quite a brutal system in so
Iona Bain: far as if you then tip over into a new tax band,
Iona Bain: then suddenly the amount of tax you're paying is a
Iona Bain: lot more. That's why people are looking for those ways
Iona Bain: to legally reduce what tax they pay. Can you talk
Iona Bain: us through why salary sacrifice could be one of those
Iona Bain: tools available?
Tim Paul: Yeah. Salary sacrifice, as it sounds, it's exactly that: you're sacrificing a
Tim Paul: portion of your salary in return for a non- cash
Tim Paul: benefit through your employer. Let's say I earn 40,000 pounds
Tim Paul: per year. I can then reduce the amount that I earn by
Tim Paul: a specific amount in order to get a non- cash
Tim Paul: benefit, which could be a gym membership, it could be
Tim Paul: private healthcare, a company car, even, cycling to work. You
Tim Paul: can get that all through your employer, and then it
Tim Paul: reduces the amount in tax that you pay because it
Tim Paul: reduces your income before the tax is deducted on your
Tim Paul: payslip. So I would then, say, have a 2, 000- pound non- cash
Tim Paul: benefit for the year, which would reduce my taxable salary
Tim Paul: to 38,000 pounds, and therefore I'm then paying less tax
Tim Paul: on that 38, 000 pounds.
Iona Bain: Salary sacrifice definitely sounds really intriguing. What does it actually
Iona Bain: look like in practice?
Tim Paul: Let's say you want to take more holiday days. You
Tim Paul: buy more holiday from your employer. You can do that
Tim Paul: through salary sacrifice. If you want subscriptions to buy a
Tim Paul: travel card, imagine you're able to do those things before
Tim Paul: you pay tax so that you're essentially saving money on
Tim Paul: your payslip because you're paying less income tax, not your
Tim Paul: insurance. So anything from gym memberships, private healthcare, subscription fees,
Tim Paul: electronic devices, it can all go through salary sacrifice and
Tim Paul: it reduces taxable income, and therefore the less tax you
Tim Paul: will pay on it.
Iona Bain: A lot of things that people will be paying for
Iona Bain: anyway from their post- tax income, maybe they could get
Iona Bain: that actually done at source, which would be much better
Iona Bain: for them. How can somebody find out what is available
Iona Bain: from their employer in terms of salary sacrifice?
Tim Paul: Well, you have to go directly to your employer and
Tim Paul: ask if they're willing to enroll you, which, I don't
Tim Paul: see why they wouldn't.
Iona Bain: Yeah, talk to your boss. See what they say.
Tim Paul: Exactly.
Iona Bain: It sounds like a great thing, but I'm not going
Iona Bain: to lie, salary sacrifice hasn't got the best brand. Those
Iona Bain: are two words that you don't want to hear together
Iona Bain: because people want to earn as much as they can,
Iona Bain: but are there circumstances actually in which going for that
Iona Bain: could actually leave you better off because of the tax implications?
Tim Paul: Yeah, definitely. As we mentioned before that when you go
Tim Paul: into the higher tax bracket, when you're going above the
Tim Paul: 50k mark, that's when it could become very beneficial, because
Tim Paul: rather than getting taxed 40% on that amount, you earn
Tim Paul: above. If you only earn, say, 53, 54, 55,000 pounds, you can
Tim Paul: then do a salary sacrifice to bring that income back
Tim Paul: down to 50, and then with that additional, you're then getting
Tim Paul: benefits from your employer, which can obviously benefit your lifestyle
Tim Paul: day to day. So it's probably potentially a better way
Tim Paul: to go about it. You're being more tax- efficient with your income. That's
Tim Paul: probably the key point.
Iona Bain: Are you seeing more people looking at salary sacrifice and
Iona Bain: seeing it as a valuable benefit that can be offered
Iona Bain: by some employers, or is it a little bit under the radar?
Tim Paul: I would say it's very under the radar. I wish
Tim Paul: more people knew about it. Maybe they could have named
Tim Paul: it something a bit more interesting, a salary benefit scheme
Tim Paul: or something like that, but people also maybe just don't
Tim Paul: really understand it, because they might assume that, " Well, it
Tim Paul: just means I'm earning less money," but in actual fact,
Tim Paul: if you think about it, you could be paying less
Tim Paul: tax and overall be better off.
Iona Bain: Salary benefit, I like that. If anyone else has suggestions,
Iona Bain: answers on a postcard, we want to hear them. What
Iona Bain: about using your pension to reduce your take- home pay?
Iona Bain: How would that work?
Tim Paul: With your pension, it works in a similar way to
Tim Paul: the salary sacrifice scheme. Once you're 22 or older or
Tim Paul: working full time, you'll be automatically enrolled into a workplace
Tim Paul: pension. And then every time you contribute to it, every
Tim Paul: penny that goes in, it gets taken off of your
Tim Paul: growth salary before tax gets deducted. Again, it reduces your
Tim Paul: taxable salary, soyou're paying less income tax and national insurance, and
Tim Paul: of course, that money then goes tax- free into your
Tim Paul: pension pot, your employer adds to it, and then obviously
Tim Paul: you put that towards your retirement, it reduces the amount of tax you
Tim Paul: pay now and it obviously benefits you later in life.
Tim Paul: It's probably the key lever, I would say, for any
Tim Paul: young person, 30s, 40s, whatever age you are, or if you're
Tim Paul: about to go into a higher tax bracket, if you've got
Tim Paul: a big bonus coming one off that might push you
Tim Paul: into a higher tax bracket, then just putting a bit
Tim Paul: more into your pension, even if it's an extra few
Tim Paul: percent, it's going to make a difference in how much
Tim Paul: tax you pay. Of course, the big difference is how
Tim Paul: much will then eventually get added by your employer, and
Tim Paul: then it compounds because it gets invested over time, and
Tim Paul: then you retire hopefully with a nice pot and you
Tim Paul: can be more comfortable and not have to rely on
Tim Paul: your kids to look after you.
Iona Bain: Yeah. None of us want that. It's one of those rare
Iona Bain: instances where it's actually a win- win. Doing what's right
Iona Bain: for you in the long term can actually benefit you
Iona Bain: in the here and now. How well- informed are we
Iona Bain: when it comes to tax? Because I can say quite
Iona Bain: honestly, I've been a financial journalist for nearly 15 years,
Iona Bain: tax is one of these subjects that I still don't
Iona Bain: really love writing and talking about, partly because it can
Iona Bain: get really, really confusing. What are the most common misconceptions
Iona Bain: that you hear about when it comes to tax?
Tim Paul: The most common misconception is thinking that your payslip is
Tim Paul: viable and it's correct. Of course, HMRC does make mistakes.
Tim Paul: I actually had a mistake of mine when I first
Tim Paul: started my employment. I was overpaying my student loan by
Tim Paul: 60 pounds a month.
Iona Bain: How long had that been going on?
Tim Paul: I caught it early. I caught it within I think
Tim Paul: three months, but over a course of a year, that's-
Iona Bain: That would add up.
Tim Paul: ... hundreds and hundreds of pounds that you're losing, that
Tim Paul: you shouldn't be. But it's good to check because often
Tim Paul: people don't realize that they are not reclaiming money that
Tim Paul: they could be. The other one is a lot of
Tim Paul: people for whatever reason seem to think that when they
Tim Paul: go into a high tax bracket, it means that they're
Tim Paul: going to be taking home less income. With the 50, 000-
Tim Paul: pound bracket, when you then go to 40% tax, a
Tim Paul: lot of people seem to think that, oh, well, because
Tim Paul: I'm now getting taxed on 40%, I'm actually worse off,
Tim Paul: but the reality is you're never worse off because the
Tim Paul: threshold means that you only pay the 40% on what
Tim Paul: you earn above that amount. So people do get very
Tim Paul: confused about that. You just have to remember it's a
Tim Paul: marginal system. Getting a pay rise is never a bad
Tim Paul: thing. Never say no to a pay rise, essentially, is the
Tim Paul: advice that I would give. But, yeah, that's one thing
Tim Paul: that I've seen a lot of people get confused about.
Tim Paul: In general, I just think that people care about how
Tim Paul: much they earn post- tax. They never really think about
Tim Paul: what they're paying on their payslips, really, because it doesn't
Tim Paul: get talked about and it's not interesting. No one wants
Tim Paul: to sit there and think about the money that they're
Tim Paul: losing to HMRC every single month. So I think it's
Tim Paul: just about awareness and making sure that people understand the
Tim Paul: importance of knowing it early because unclaimed tax for years
Tim Paul: and years is really going to be putting you in
Tim Paul: a worse position. Pensions, again, another one putting you in
Tim Paul: a worse position if you just don't think about it.
Tim Paul: The key is to make sure that you're reading up
Tim Paul: and then taking action.
Iona Bain: There may be people thinking, is this stuff that I'm
Iona Bain: allowed to do? Because when we talk about tax, sometimes
Iona Bain: we get a bit uncomfortable. People think, sounds a little
Iona Bain: bit like tax avoidance. Just talk us through how legal
Iona Bain: all this is.
Tim Paul: Completely legal. I think with the salary sacrifice, some people
Tim Paul: might think that, oh, my employer might not want to
Tim Paul: do that or might not be willing to or they
Tim Paul: can't, but it's actually in your employer's best interest as
Tim Paul: well, because by going through salary sacrifice, they're actually reducing
Tim Paul: their national insurance contributions, because employees make national insurance contributions,
Tim Paul: but employers do at the same time as well. So
Tim Paul: it's in the best interest of both because they both
Tim Paul: will reduce the amount of national insurance they pay, and
Tim Paul: instead that money will go towards actually helping the employees
Tim Paul: with whatever it is that they want to do. It is
Tim Paul: a win- win and, like I said, completely legal.
Iona Bain: And when it comes to pensions, that's something that the
Iona Bain: government wants us to save more for because that reduces
Iona Bain: state dependency later on.
Tim Paul: Yes. Exactly.
Iona Bain: Are there times where people need to be a bit
Iona Bain: more careful about reducing their take- home pay?
Tim Paul: Yeah. There'll be one instance where if you're looking to apply
Tim Paul: for a mortgage in the near future, you just want to make
Tim Paul: sure that you're not reducing your income by a significant
Tim Paul: amount whereby it could impact what lenders call accessibility of
Tim Paul: affordability, so essentially is really about speaking to your mortgage
Tim Paul: broker, making sure that they're aware that you're claiming whatever
Tim Paul: benefits you are through salary sacrifice and making sure that
Tim Paul: it doesn't impact your affordability when you come to do
Tim Paul: the mortgage application. But again, we're talking about it would
Tim Paul: only really have an impact if we're looking at maybe
Tim Paul: upwards of 5, 6, 7, 000 pounds that you're sacrificing
Tim Paul: in salary. Then it could start to have a bit
Tim Paul: of an impact on your mortgage application. The other one
Tim Paul: would be your national insurance contributions. To get your state
Tim Paul: pension, you obviously need 35 years of qualifying national insurance
Tim Paul: contributions. If you're increasing your salary sacrifice and then reducing
Tim Paul: your income, then you could potentially fall below that threshold,
Tim Paul: but that threshold is only about 6, 400 pounds a
Tim Paul: year. Most people will be significantly above that, anyway, but
Tim Paul: just one other thing to consider.
Iona Bain: If someone is about to approach one of these tax
Iona Bain: thresholds, is there a checklist that they can go through
Iona Bain: in terms of what they should be thinking about?
Tim Paul: The key thing is to understand what's going on in
Tim Paul: your payslip. What does your tax code say? Does that
Tim Paul: correspond to what it should say? These are the things
Tim Paul: to check. And then if you're getting closer to a
Tim Paul: higher tax bracket, once you've obviously done the initial check,
Tim Paul: then it's a case of thinking about salary sacrifice, how
Tim Paul: much you contribute to a pension, and those kinds of things.
Iona Bain: All really, really good tips, Tim. Thank you very much.
Tim Paul: You're welcome.
Iona Bain: That's all for part one. Next time, we'll be talking through
Iona Bain: tax on side hustles, rental income and personal savings allowances,
Iona Bain: and we'll also cover tax- free childcare and have some
Iona Bain: quick wins to make sure you're not paying any more
Iona Bain: tax than you need to. This podcast is brought to
Iona Bain: you by L& G. You can keep up with the
Iona Bain: show on YouTube, TikTok and Instagram, @ legalandgeneral. If you have a
Iona Bain: question or a topic that you would like answered on
Iona Bain: the show, then please do get in touch on our
Iona Bain: socials. We would absolutely love to hear from you. Until
Iona Bain: next time, see you soon.