He warned people of all ages don’t understand a key tax rule
Money expert Martin Lewis has explained a crucial tax rule that trips up countless Britons. Speaking on his BBC podcast, the consumer champion dished out some essential “life lessons” everyone needs to know.
The finance expert shared some vital money tips alongside broader life guidance, including some nuggets of wisdom from his loyal listeners. One fan penned a message saying it’s crucial for people to get their heads around how taxes work. Reacting to this point, Mr Lewis said he is astonished at the huge numbers of people who remain clueless about the basics of taxation.
He pointed out that even many older Brits haven’t got to grips with how the system operates. He said: “I am still gobsmacked, I’ve even had people who are about to go into the state pension age, and they ask the question about income tax. They still don’t realise that income tax is a marginal issue.”
With the state pension age currently sitting at 66, you would hope that people would have some understanding of their HMRC obligations by that point. Mr Lewis went on to break down exactly where the confusion lies.
Income tax misunderstanding
Mr Lewis said: “I’m going to phrase this the way I most commonly get it, but it happens at all ages and all stages in life. It staggers me that I will get people saying, they are about to make me a higher 40 percent rate taxpayer by giving me a salary increase, should I turn it down because I don’t want to pay 40 percent tax on all my income?”
The consumer advocated pointed our the misunderstanding suggested by this question: “Of course, you only pay 40 percent tax on the amount above the threshold, you’re still earning more.
“The fact that we still have people in society who don’t know that means we have a really poor educative process.” Under the current system across England, Wales and Northern Ireland, workers benefit from a standard personal allowance permitting them to pocket up to £12,570 annually tax-free.
This allowance remains in place as your earnings climb, with the basic 20 percent rate applying to income above £12,570. The higher 40 percent rate kicks in for earnings between £50,271 and £125,140, although crucially your personal allowance stays intact, so your income between £12,570 and £50,270 continues being taxed at the standard 20 percent rate.
However, there is a change to note once your income moves above £100,000. Beyond this point, the personal allowance begins disappearing – you forfeit £1 of allowance for every £2 earned above this figure.
Make sure you understand
Each £1 of your depleted allowance is charged at the 40 percent rate, meaning workers effectively face 20 percent tax on it. This means you effectively pay a 60 percent tax rate on earnings between £100,000 and £125,140.
Any earnings beyond £125,140 faces the 45 percent additional rate. The income tax system is slightly different in Scotland.
In light of the common lack of knowledge around tax, Mr Lewis urged everyone to familiarise themselves with the rules and to regularly check over their situation. He said: “Do make sure you understand about tax, and you understand about your payslip, and you understand what your pension is. Look to save or even better in the long run, look to invest.”
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