How to make the most of your income if you earn over £43,000 in Scotland
And what even fewer people may be aware of is the fact that pension contributions – if done in the right way – can be used to mitigate a lot of the amount being paid in tax.
The divergence between Scotland and the rest of the UK is a result of the Scottish Government now using its income tax raising powers, while National Insurance contributions remain set at Westminster.
For this tax year, the Scottish Government has a tax band from £11,850 to £13,850 where the marginal rate of tax – income tax plus NI contributions - is 31 per cent, compared to 32 per cent in the rest of the UK. But when you get to those earning between £43,430 and £46,350, the marginal rate for those working in Scotland is 53 per cent, much higher than the 32 per cent for workers in other parts of the UK.
Bob Hair, wealth planning director and head of Edinburgh office at Cazenove Capital, says: “This is pretty serious and isn’t affecting just people who are super-high earners. It could be a senior nurse or police officer, for example, paying more than half of a portion of their income in tax.
“You could work for same national company, but if one employee is in North Berwick and one is just south of the border in Berwick, it’s a completely different system.”
And Mr Hair has a suggestion for people in the £43,430 to £46,350 category – they can use a certain method of pension payments to reduce their taxable income to below the lower threshold.
“It’s not just a case of putting more in your pension, it’s the way you do it,” explains Mr Hair. “If you use a form of salary exchange where you say to your employer that you want to exchange salary in return for your pension contributions, then you’ll pay less NI and less tax.
“While employers don’t have to offer salary exchange, many well-organised companies will provide this pension arrangement. Employers are becoming more sensitive to the need to look after employees especially now there is some disparity in the tax system depending on the postcode lottery of whether you live in Scotland or not.
“Salary exchange is just one potential solution to an issue created by different tax systems in the UK. People may not feel they can afford to give up that level of income to put into a pension, but if more than half of it is going to go in tax it might encourage them to do so. It’s also a way to maintain child benefit which reduces at certain levels of household income.”
If you do earn slightly over £43,430, it may pay to check whether you are contributing to your pension through salary exchange and, if not, ask how you can. Not only will you pay less in tax, you are building up more of a nest egg now for the longer term.