I need to become a Higher rate tax payer ...

carpediem67

Currently I earn around £800 less than the threshold for paying higher rate tax and, to be honest, it would suit me if I was to become a higher rate tax payer.

If I add up additional pension contributions and charity donations then this comes to around £4,600 per year. At the moment i get 20% tax relief on the additional pension contributions and I use Gift Aid when giving to charities.

Now if I was a higher rate tax payer then am I right in thinking that I would be entitled to an additional 20% tax relief on the additional pension contributions and could I claim back 18% tax on the charity giving?

So, how could I become a higher rate tax payer? Well, I really don't have additional hours to go looking for work and I don't get overtime. Therefore what I'm thinking about is borrowing an additional £20,000 on my mortgage (I'm re-mortgaging at the moment) and getting income from this. I can get 5% savings on this while borrowing at 5.25%. This will give me about £1000 income from interest on the £20,000 (which is around £800 after tax). I know that I would have to inform the Inland Revenue of any income made above the higher rate tax threshold and that this would be taxed at 40%.

So, is all this viable and, more importantly, legitimate to do??? Can anyone see any pitfalls? Is it an easy process to claim tax back on the additional pension contributions and charity giving? I have formal records for what I contribute to both of these.

Any advice would be appreciated.

Elaine_Wilson

You can only claim additional relief to the extent that you pay higher rate tax. In your example you will receive additional investment income of £1,000 but as you are currently £800 below the threshhold only £200 would be subject to higher rate tax. As 20% has already been deducted you would be liable for an additional 20%, or £40.

This liability can be covered by your pension contributions so nominally you have saved £40.

But - you are losing £50 per year as your mortgage interest is higher than the investment interest.

mrkbrrws

If you look at it slightly differently the pension contributions and gift aid payments increase the higher rate threshold, so actually you are well within the basic rate band.