How to extend your basic rate tax bracket

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How to extend your basic rate tax bracket

Yasmine Kaleem • 15 June 2022

Time to read: 2 minutes

Some popular questions we get asked are ‘how do I reduce my income tax?’ and ‘how do I avoid being taxed at 40%?’. In this post, we're explaining two ways to extend your basic rate tax bracket - via gift aid and pensions contributions.

When donating to UK registered charities and contributing to a private pension scheme, an individual can gain tax relief. This will help increase an individual’s basic rate tax bracket so that more of the income is taxed at 20% before moving to the higher rate tax bracket of 40%. This tax relief can be applied when completing the annual self-assessment tax return.

Donating to UK registered charities via gift aid and contributing to private pension schemes must be completed in an individual’s personal capacity to gain this tax relief.

Important note: this tax relief cannot be claimed when donating to UK charities via gift aid and pensions via a limited company. When donating to UK charities and contributing to pensions via a limited company, these transactions are classed as business expenses instead.

Gift aid

Donating via gift aid means charities can claim an extra 25p for every £1.00 an individual donates. To obtain this claim, the individual needs to make a gift aid declaration by filling in a form which should be available from the charity.

HMRC example - if a higher rate taxpayer (an individual who pays 40% income tax) donates £100.00 to charity, they can claim gift aid to make their donation £125.00. The taxpayer can then claim back £25.00 (£125.00 x 20%).

Private pension contributions

The annual allowance an individual can contribute to their pension is £40,000.00 gross however, some people have a lower annual allowance. Contributions made by the individual must be equal to or less than your total earnings for the tax year in which they are made.

For example, if an individual earns £30,000.00 but puts £35,000.00 into their pension pot, they will only be entitled to tax relief on the £30,000.00 – equal to their annual earnings.
If an individual earns £65,000.00 and would like to put this amount into their pension in a single tax year, they will only be entitled to tax relief on the £40,000.00 – the annual allowance.

If you have any further questions on gift aid, pension contributions, or any other tax reliefs that may be available to you, please do not hesitate to contact us. Book your consultation using the form below.

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For more information visit:

https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

https://www.gov.uk/donating-to-charity/gift-aid#:~:text=Example%20You%20donate%20%C2%A3100,of%20tax%20on%20your%20donation

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