More than one in ten adults will soon pay the highest rate, down from less than 9% today and just 4% in 1990, according to new forecasts from the Institute for Fiscal Studies think tank following the budget fall, as shown in the graph above.

The number of people paying the highest fees has roughly tripled in three decades as average incomes have been squeezed.

But there is a way to avoid the higher toll, even if your pay is well over the threshold.

How it works

Saving money in a pension reduces your pay for income tax purposes. Save enough and a higher rate payer can escape a 40pc tax. The downside, of course, is that the take-home pay is reduced and all the money held in a pension can only be withdrawn from age 55.

Tax relief is paid at the same rate as income tax and the state supplements your pension with an effective allowance when you make a contribution. A 20pc base rate taxpayer would only need to put £ 8,000 into a retirement pot to make a pension contribution of £ 10,000, for example, while a higher rate taxpayer might not have to. – need to save only £ 6,000 to get the same result.

It is possible to save enough in a pension each year to entirely avoid a higher rate tax, while ensuring a 40% increase in your retirement savings.

A 40-year-old man with a salary of £ 55,000 a year, who then receives a pay rise of £ 10,000 every five years, could avoid a higher tax rate for the rest of his career.

In the early years, annual pension contributions would not need to be particularly high. When you earn £ 55,000, you would only have to save £ 4,280 a year to dodge the 40 percent income tax. This figure is the “gross” contribution. Due to the pension tax relief system, you only pay £ 2,280 yourself.


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