How do income tax codes work?

Most individuals have a tax-free threshold (currently £12,570) on which no income tax is levied. The next £37,699 is taxed at 20%, the next £74,869 is taxed at 40% and after that tax is 45%.

Another tax. National Insurance, is added to those below the state retirement age. Your tax code better indicates your circumstances because His Majesty’s Revenue and Customs (HMRC) might have recalculated your assessment if they need to claw back unpaid tax from a previous year or workplace benefits exceed your personal allowance.

A 60% tax trap also affects those earning between £100,000 and £125,000 – probably about 336,000 individuals in the UK. This is because for every £100 earned between £100,000 and £125,000, they suffer 40% tax, AND they lose £20 from their personal allowance, which equates to 60% tax.

The simple solution is to invest in your pension, an independent financial adviser will explain how this works.

Some employers offer Salary Sacrifice schemes to provide a variety of benefits. The salary reduction is an effective way to reduce tax exposure. If your HR department cannot explain it – ask an Independent Financial Adviser.

The figures used relate to the current tax year 2023-2024. If you require tax advice, speak with a qualified accountant.

Eamonn Dorling Dip PFS

Senior Independent Financial Adviser

Brooks Wealth Management

Tel: 01733 314553 or 07767 795816

Email: Eamonn@brookswealth.co.uk

Brooks Wealth Management is a trading style of Ampris Limited is an appointed representative of Wealthline Limited, registered in England 08761632 (Registered office: 34 Thorpe Wood, Peterborough) Wealthline Limited is authorised and regulated by the Financial Conduct Authority 684319