Martin Lewis: How to claim working from home tax relief
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Britons have been warned to be “be aware” and avoid falling into the 60 percent tax trap as over half a million people have been hit with an unexpected charge. On his Youtube channel, financial planner Chris Bourne explained what this trap is and how people can avoid paying thousands more in tax.
He explained that often people look at other investment vehicles other than pensions when they know their pension contributions will take them over the lifetime allowance but this may not always be the case.
The most common example is when someone’s income takes them above £100,00 a year, he said.
At this level of income, people start to lose their personal allowance. They lose £1 for every £2 they earn over £100,000.
As the personal allowance for the year 2021/2022 is currently £12,570, people will totally lose it when they exceed £125,140.
This means that Britons would start paying a higher tax rate at a lower earning level.
Therefore, people will suffer an effective tax rate of 60 percent on earnings between £100,000 and £125,140.
This can be called the 60 percent tax trap and thousands of people are caught in it each year and end up paying so much more.
To mitigate these loses, Mr Bourne gave tips which could help people save thousands.
He said: “Make pension contributions.
“Lets say you earn £140,000 a year, making a pension contribution of £40,000 brings your effective earnings for tax purposes down to £100,000 again.
“That means that not only have you bought back your personal allowance and avoided that 60 percent tax trap, but you’ve also been awarded 40 percent tax relief on the contribution.”
He explained that some people don’t do this as they are afraid their pension will exceed the lifetime allowance in the future.
However, this would mean they are accepting a 60 percent tax rate now to avoid a 25 percent tax charge that they might have to pay in the future.
“That makes no sense,” he said.
He continued: “It makes even less sense that these people are often in their late 40s or early 50s and the lifetime allowance charge does not even have to be paid until age 75, assuming you live that long, and haven’t decided to crystallise your whole pension pot before then.
‘We have no idea what the lifetime allowance is even going to be 25 years in the future, or even whether it will still exist.
“Don’t cut your nose off to spite your face.”
Having a retirement plan can be a good way of ensuring people have enough in their pensions for the future.
People can build their pensions to ensure they have a comfortable retirement.
Mr Bourne concluded by encouraging people to use pensions. He said that it is never too late to start saving towards this, no matter what age people are.
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