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Autumn Statement: How can employees mitigate the income tax squeeze?

The Chancellor, Jeremy Hunt, presented his Autumn Statement to Parliament earlier today. As expected, there was a combination of tax increases and cuts to public spending.

Employment taxes

One of the biggest changes was the announcement of a decrease to the additional rate income tax threshold from £150,000 to £125,140 from 6 April 2023. This is the threshold at which the income tax rate goes from 40% to 45%, costing employees an additional 5% tax on any income earned above this limit. For an employee already earning above £150,000, this increase will mean paying an extra £1,243 in tax annually, from next April. The Government expects this to bring in an additional £3.7 billion over the next five years.

With personal tax and National Insurance (NI) thresholds also being frozen until April 2028, this effectively means anyone receiving a pay rise during this period will end up paying more tax and NI. The Government argues these proposals will ensure “fairness”, as the highest income households will pay a larger share.

The decrease in the additional rate threshold may leave many highly paid employees wondering if there is a more tax efficient way to be remunerated, rather than suffer an extra 5% tax on their earnings. This is an age-old question, and one that doesn’t have many suitable, or legal, options these days.

Salary sacrifice

There is, however, always the option of salary sacrifice. This is where you agree to a contractually lower salary in exchange for a (tax efficient) benefit. Typically, pension contributions represent the best option in this space, considering annual and lifetime contribution limits. The full value of the salary that is ‘sacrificed’ could be paid into a pension fund, rather than being paid as salary and therefore subject to the additional 5% tax due from the changes to the additional tax rate threshold. There are also NI savings for both the employee and employer.

Having said that, with the current cost of living crisis putting a squeeze on everyone’s finances, cash may well be king. Taking a hit with the 5% tax increase may be preferable to an overall reduction in salary and therefore take-home pay.

Electric vehicles

The current flavour of the month for salary sacrifice schemes is in relation to low emission vehicles (LEVs – vehicles with less than 75g of CO2 emissions per kilometre). As part of the Government’s “green” agenda, the benefit in kind charge for an LEV as a company car is significantly lower than it would be for a petrol or diesel car. When combined with a salary sacrifice arrangement, this can represent a very tax efficient way of obtaining an LEV.

However, there was an announcement in the Autumn Statement that is going to make LEVs slightly more costly from a benefit point of view in the future. Currently, a fully electric LEV attracts an appropriate percentage charge of only 2% (compared with 30%+ for fuel guzzling vehicles). It is this value that is subject to tax on the employee, and Class 1A for the employer.

This rate will be increasing by 1% a year from 2025-26 to 2027-8, where it will be 5%. Ultra-low emission hybrid cars will see their appropriate percentage increase across the same period, also by 1% a year, up to 21% in 2027-28.

For many higher paid employees, I expect the prospect of cash in their pockets, albeit with an additional 5% taken out, will still be preferable. But for those lucky enough to have a realistic choice about their remuneration options, now could be a great time to revisit pension arrangements and LEVs.

Childcare costs

One thing that didn’t come up at all in the Autumn Statement was childcare. This is one of the biggest barriers stopping people working or working as much as they would like to. The typical costs of childcare can be relatively huge, negating any advantage from working and earning.

Whilst there is still some limited Government support in this area, so much more could be done. Instead, the Government is focussing its efforts on over 600,000 Universal Credit claimants, whose typical household income is the equivalent of 15 – 35 hours at the National Living Wage. They are going to be required to meet with a dedicated “work coach” to support them to increase their hours or earnings. This all sounds very nice, but who is going to look after, or pay for someone to look after, the children?

For more analysis, visit our Autumn Statement hub.

FEATURING: Joe Rowsell
Joe joined the firm in August 2022 as a manager within the Employer Solutions team. He started his career at HMRC in 2003, working initially… read more
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