How higher rate taxpayers can soften April's pain

750,000 more taxpayers will have to pay at the higher rate from April. But there are areas where you can still save tax
childcare child
Higher rate taxpayers should claim childcare vouchers before April if they want to get the full tax benefit. Photograph: Alamy

From April 750,000 basic rate taxpayers will suddenly find themselves paying 40% tax – and they won't even have had a pay rise. The government is lowering the threshold at which people start paying the 40% rate from £37,401 of taxable income this tax year to £35,001 in the next.

The new tax thresholds and personal allowances mean that anyone up to the age of 65 will start paying 40% tax on earnings of £42,476 and above. This is to ensure higher earners don't benefit from a more generous personal allowance (the amount you can earn before paying tax), which rises £1,000 from £6,475 to £7,475 from 6 April for those under 65. For those aged 65 to 74 it rises from £9,490 to £9,940.

The child tax credit system is also altering and tax relief on childcare voucher schemes will be reduced – a loss that will hit many households with a higher rate taxpayer, who will no longer receive child benefit in 2013.

"Added to that, the rise in VAT means the cost of living is going up," says Mike Warburton, a tax director at accountant Grant Thornton. "For people earning just over the higher rate threshold, things are getting tough. They need to get used to the idea that their living standards might drop."

The personal allowance rise is good news for those on low incomes, with about 500,000 people paying no tax from April. But the Institute of Fiscal Studies has calculated that, on average, households will be £200 a year worse off as a result of the new tax rules and benefit cuts.

One of the soon-to-be higher rate taxpayers is Luke Sewell, a recruitment manager for Pimlico Plumbers, who lives in London. From April, he will have to pay the higher rate of tax on around £2,000 of his earnings; taking into account the other changes, he reckons he'll be more than £300 a year worse off.

"It will make a difference," says Sewell, who is 30 and currently buying a house with his girlfriend. "We want to start a family, and paying extra tax means it's harder to save. Fortunately, I'm able to do overtime and make up the shortfall – but it's not ideal."

People who, like Sewell, are moving up the tax brackets need to become more tax literate, says David Kilshaw, a partner at accountant KPMG. "It might be a steep learning curve, but you can save tax in other areas," he says.

So where can you save tax?

Childcare vouchers

Childcare vouchers operate through a salary sacrifice scheme: the employer takes the money out of the employee's gross salary and pays it directly to the childcare provider. This means the employee can pay for the childcare out of tax free earnings – a saving of up to 50% for those paying the highest rate of tax.

However, the rules are changing: from 6 April higher rate taxpayers joining childcare voucher schemes will only be eligible to claim basic rate tax relief of 20%.

"The changes mean higher rate and super rate taxpayers really should sign up to childcare vouchers now to lock into the higher rate tax relief," says Iain McMath, of Sodexo Motivation Solutions, an employee benefits company. "It's currently worth up to £1,195 per parent a year and parents who sign up after 6 April could lose up to half the tax relief currently available."

The change in tax treatment does not apply to other salary sacrifice schemes and work benefits, such as cycle to work (where employers buy bikes and in effect hire them to employees), food vouchers and health insurance. However, Warburton says HMRC does not like salary sacrifice and is believed to be looking at these schemes, so make the most of them while you can.


One of the main ways to claw back tax is by piling money into a pension, as contributions benefit from tax relief at the investor's marginal tax rate. Usually your employer takes the pension contributions from your pay before deducting tax. You only pay tax on what's left, so whether you pay tax at basic or higher rate or additional rate you get the full relief immediately. If you pay into a personal pension you can claim back the tax relief on your self-assessment form.

Lee Blackshaw, senior manager at accounts PricewaterhouseCoopers, says: "If you're going to be a higher rate taxpayer and you don't yet have a pension, set one up. If you already have one, increasing your contributions will lower your tax bill. The 40% tax relief really makes it worthwhile."

Charitable donations

If you pay higher rate tax, both you and the charity can claim back tax on charitable donations through Gift Aid.

"You can fill in a self assessment form for this, but it may not even be necessary," says Tim Gregory of accountants Saffery Champness. "If you keep records, then contact the tax office and tell them how much you donated to charity last year. It may adjust your tax at source."

Use your tax allowances

If you have savings, it is madness not to use your tax allowances, says Philippa Gee of Philippa Gee Wealth Management. Start with an Isa, which allows you to invest up to £10,200 tax free, rising to £10,680 on 6 April. Half the total can be invested in cash, with the rest – or all – in shares-based investments.

Married couples can also save tax by transferring assets to the lower tax rate payer, says Gee. If one is a higher rate taxpayer and the other a basic rate payer, keeping the assets – including stocks, shares, properties and even bank accounts – in the name of the lower taxpayer means, as a couple, they will cut their tax bill.

Other ways to ease the burden

■ Check your tax code – if you're on the wrong one you could be paying too much tax. The HM Revenue and Customs website has a section on what your tax code means and what to do if your code is wrong.

■ You have a capital gains allowance of £10,100 in the current tax year. This means you can realise gains worth up to this amount without paying any tax. You can make use of this by putting money in investments that produce capital growth rather than income.

■ Invest in your children's Child Trust Funds. Although the scheme was axed for new recipients from the end of 2010, those who already have funds can continue to receive contributions of up to £1,200 a year from relatives and friends – the returns are tax free.

■ If money is tight, consider renting out a room in your home. You can earn up to £4,250 a year tax free through the rent a room scheme.

National Savings & Investments offers a range of tax free savings above and beyond Isas – including premium bonds, index linked savings certificates, fixed interest savings certificates and children's bonus bonds.

■ If you work from home, make sure you claim your full expenses entitlement. If you are an employee, you can either get a flat-rate deduction of £3 a week for each week that you have to work from home (this does not include the cost of telephone calls), or more if your extra expenses are bigger. If you are self employed you can claim a proportion of your household expenses against your business income. The amount that can be claimed relates to the number of rooms used for the business as a proportion of the total number in the house.