How to benefit if taxes rise

Brace yourself. Whispers in Westminster suggest a headline rise in Income Tax is on the cards - maybe 1p, maybe 2p. The government needs cash, and a hike in income tax brings in billions.

The glass-half-empty view? There goes more of my hard-earned salary.

The glass-half-full view? If I shrink my income, I can pay less tax.

We love a positive outlook on life…even tax. But who wants to shrink their income? 

OK, time for a bit of BBC balance. 

Tax policy isn’t just about raising money. Governments also use tax to incentivise behaviour. One of those is ‘salary sacrifice’ - a way to pay for things from your gross salary, so there’s less for HMRC to take from.

If the tax rate goes up, the money you save by avoiding that tax goes up too. So when the Chancellor takes, you give (to yourself). 

Confused? Let’s break it down.

Let’s look at what a 2p hike would mean for the main brackets in England, Wales and Northern Ireland:

The takeaway: every pound you put towards a salary sacrifice scheme is a pound that doesn’t get taxed. You don’t have that pound in your pocket, but neither does HMRC. Instead, you’ve used it on something tangible, like childcare, a bike, or a car.

Let’s say you sacrifice £300 per month (£3,600 per year) of your salary for a car. Here’s what the maths look like right now.

And here’s what the maths look like if income tax goes up.

In other words, when income tax rises, your car salary sacrifice becomes an even better deal. The higher your rate, the sweeter your saving.

Company cars are usually taxed as a “benefit in kind” (BiK), with a higher BiK for cars chugging out more CO2. Get yourself a real gas guzzler, and 37% of the car’s value* is added to your taxable income. (Yep, more tax). But it’s only 3% for an EV (thanks, zero emissions). 

So when tax rates rise, petrol drivers feel the squeeze, but EV drivers barely notice it.

*P11d value

We’re not in the business of making economic predictions. But we do like to help people make the most of their money.

If income tax goes up, don’t panic. Just be a financial smarty-pants.

Getting an EV on salary sacrifice can turn a tax rise into a win.