New tax year, new highs?

Drawing of four birds sitting on the wires tweeting about new tax year


MoneyPlus Features Team

2nd May 2013 at 2:03pm

The new tax year kicked off on the 6th April 2013 with a reduction in the higher rate tax threshold, do you know if the change will impact you?

To find out just how aware people are of the higher rate tax threshold, we carried out some research.

When we asked people to pinpoint from a list of four options what they thought they needed to earn in the new tax year before they started paying 40% tax, the majority (56%) got it wrong and an additional 13% said they didn’t know.

For tax year 2013/14, 40% income tax starts to apply to income above £41,450.

For tax year 2013/14, 40% income tax starts to apply to income above £41,450.

But fewer than 31% of people were aware of that figure.  And it’s been reduced from the last tax year, when it was £42,476, which means more people will be joining the 3.8 million people in the UK who are already affected by 40% income tax rate.

People lead busy lives, so it’s perhaps not surprising that so many people lose track of when 40% tax starts to apply.

But if you’re one of the many who are not fully up-to-date on the new tax rules, it could also mean that you are not taking steps to make the most of tax-efficient savings and investments options, which could give you more money in your pocket.

With efficient tax planning, it could be possible to avoid falling into the higher rate tax bracket.

Paying into a personal or employer’s pension scheme is a simple way to minimise your income tax bill.

The added bonus is, of course, that you are bumping up your retirement savings as well as reaping the tax benefits of investing in a pension scheme at the same time.

The way this works is basically like this.

The payment you make to your personal pension plan has the effect of expanding the band of your income which is taxed at 20%, rather than 40%.

Gift Aid for donations to charity works in a similar sort of way.

So, if your income is in the region of £41,450, it pays to keep on top of tax changes.

It can also pay to make the most of tax efficient savings and investments such as ISAs.

With a Stocks and Shares ISA you could benefit from making regular payments, compared to a one-off lump sum.

That’s because of the effect of something called ‘pound cost averaging’.  What this means is that a fall in the stockmarket is not necessarily such bad news, since your regular payment will buy more units or shares in your chosen fund.

So you’ll have a bigger holding as and when the stockmarket recovers.

It’s a good reason not to wait another year, to have a mad dash to fund your ISA in March 2014 – a regular drip-feed of your money into an ISA can be much more convenient and is worth considering.

For more information on the new tax year and getting your financial plans in place, see our page.

Source of the number of higher rate taxpayers is Institute of Fiscal Studies


Pensions are a long-term commitment.

As with any investment the value of your investment can go up or down and may be worth less than what was paid in.

Remember that laws and tax rules may change in the future. The information here is based on our understanding in April 2013. Your personal circumstances also have an impact on tax treatment.

All research figures, unless otherwise stated, are from YouGov Plc.  Total sample size was 2059 adults. Fieldwork was undertaken between 25th – 28th January 2013.  The survey was carried out online. The figures have been weighted and are representative of all UK adults (aged 18+).

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