Following the announcement of the reduction in the threshold at which Additional Rate Income Tax becomes payable, from 6 April 2023, individuals who earn £150,000 and above will pay income tax and national insurance (NI) of £27,271 on the part of their income that falls between £100,000 and £150,000. This equates to an effective tax rate of 54.5% on this income, compared to 52.05% this tax year (this does not take into account the effect of the additional NIC payable for part of this tax year). 

When this is coupled with the announcement that tax bands are not going to be increased until 2028, this is very unappealing. So, what can those affected do to mitigate the increase in income tax? 

Here’s two ideas: 

For the individual themselves, perhaps a reduction to a four-day working week could help; this could mean a 20% cut in gross pay. But, for someone who was earning £140,000 full-time, reducing to a 4-day week, as salary will then fall into a lower income tax bracket, the reduction in net pay is 15%.

Salary sacrifice is another option; again, with a salary of £140,000, by swapping £28,000 for an employer pension contribution, they would be in the same net salary position. Plus, they would have an additional £28,000 contributed to their pension plan, potentially more if the employer adds the NI saving as well. 

If you are affected by the reduction in the threshold at which Additional Rate Income Tax becomes payable – the threshold reduces from £150,000 to £125,140 from 6th April 2023 – contact your financial planner to discuss strategies appropriate to you.