Higher rate tax band - things to be aware of?

[Energize]

Why would you not legally avoid what you don't have to pay?
Evasion is illegal, but avoidance is prudent.

Evasion is prudent, why pay for vanity projects and MP's lavish 2nd homes. #based

Seriously though, there is a case to be made that avoidance can be more unethical than evasion, legality is arbitrary and not really here nor there as far as ethics are concerned.

 

[Maccapacca]

Someone with a student loan getting a £30k pay rise from 20 to 50k will only keep £65 per day (less, after pension contributions)

The function of government is to remove money from the people and distribute to organisations.

 

[Freefaller]

They key is to not fall in the 60% tax trap.

By increasing pension contributions you end up paying less tax, and although you take a little less home, it's not as much as the pension contribution. i.e. if you increase your pension contribution by 4%, you're only lowering your income by around 2.5% rather than 4%.

https://adviser.royallondon.com/tec...relief/60-tax-relief-on-pension-contributions

This explains the 60% tax trap.

Of course if you get a bonus that pushes you into the 100k mark which happens to thousands of people, then you can do a lump sump pension contribution (I believe) and declare it in your SA as it'll then lower your actual take home salary to below 100k.

 

[uncle_rufus]

My plan is to just factor the bonus in and set my contributions so that I end up below the limit overall without having to do a lump sum contribution (I think?). The only thing I'm not sure of is if I should aim for just under 100k or more like 95k or 90k to give myself a bit of leeway - for things like extra income for being "on call", dividends, interest and all that jazz... so that I don't accidentally push back above the limit unexpectedly (although I suppose if that happens I can always correct it with a lump sum contribution so it all works out either way)

 

[OldKitMan]

They key is to not fall in the 60% tax trap.

By increasing pension contributions you end up paying less tax, and although you take a little less home, it's not as much as the pension contribution. i.e. if you increase your pension contribution by 4%, you're only lowering your income by around 2.5% rather than 4%.

https://adviser.royallondon.com/tec...relief/60-tax-relief-on-pension-contributions

This explains the 60% tax trap.

Of course if you get a bonus that pushes you into the 100k mark which happens to thousands of people, then you can do a lump sump pension contribution (I believe) and declare it in your SA as it'll then lower your actual take home salary to below 100k.

Does this mean that if you had say a salary of £120,000 per year you would make a payment of £16,000 to you pension, basic rate relief takes that up to £20,000 and your taxable salary is then £100,000. You then get a tax rebate for the higher rate relief as well, would that be around a £4k rebate?

Interesting stuff, maybe one day it'll apply to me but this seems reasonably straightforward.

 

[ci_newman]

Does this mean that if you had say a salary of £120,000 per year you would make a payment of £16,000 to you pension, basic rate relief takes that up to £20,000 and your taxable salary is then £100,000. You then get a tax rebate for the higher rate relief as well, would that be around a £4k rebate?

Interesting stuff, maybe one day it'll apply to me but this seems reasonably straightforward.

Unless the payment is in the form of salary sacrifice, this is exactly how it would work. Although I'm far from the figures reported in here, I salary sacrificed my annual bonus this year for tax benefits which means I don't get the basic rate relief because it wasn't taxed in the first place.

 

[Freefaller]

I'm no financial whizz but if you're in the 40% bracket it makes financial sense to me at least to claim higher rate tax relief on pension contributions regardless. The actual impact to your take home salary is marginal and your preparing yourself for a more secure future (in general).

 

[OldKitMan]

I'm no financial whizz but if you're in the 40% bracket it makes financial sense to me at least to claim higher rate tax relief on pension contributions regardless. The actual impact to your take home salary is marginal and your preparing yourself for a more secure future (in general).

Yes, I do that, it was a bit weird at first as my previous employer did it all salary sacrifice so there was no relief to claim as it was all done before tax. My next employer did it the other way where you get the 20% basic rate relief automatically and then get the other 20% as a tax code change/rebate. I'll bet there are a significant number of 40% tax payers that aren't claiming this.

 

[Freefaller]

Yes, I do that, it was a bit weird at first as my previous employer did it all salary sacrifice so there was no relief to claim as it was all done before tax. My next employer did it the other way where you get the 20% basic rate relief automatically and then get the other 20% as a tax code change/rebate. I'll bet there are a significant number of 40% tax payers that aren't claiming this.

Unfortunately you are probably right. PAYE is supposed to help automate this, but it really doesn't help you maximise your tax efficiencies, and also a lot of people don't want to do a SA either to help maximise what they can get. It's not wonder people get lumbered with funny tax codes, tax bills and so on....

 

[GSXRMovistar]

I'm no financial whizz but if you're in the 40% bracket it makes financial sense to me at least to claim higher rate tax relief on pension contributions regardless. The actual impact to your take home salary is marginal and your preparing yourself for a more secure future (in general).

Just be careful with your pension lifetime allowance (LTA) otherwise you could be hit with the tax on the other end.

 

[A2Z]

Interesting thread. Including overtime I'm in the £60k-£70k bracket, PAYE, should I be doing something to increase my pension/tax relief? As I have never looked into it in detail.

I pay 5% into my pension, employer about 33%. On my payslip only 4% is actually deducted. I'm fortunate to be on a 'gold plated' final salary pension, for how long who knows as they are looking to change our (TfL) pension. I know I can pay AVC (never have) but apart from that I have no idea what else is possible, never even knew about this additional relief you can get if you do a SA, which tbh I don't want to do unless it's worth it.

 

[Skynet5]

Congrats on the payraise. You've reached the rich get richer level 1.

I've only skimmed this thread. So apologies if I'm repeating. I saw mention of self assessment....

There is NO need to do this.

If you are not financially interesting (i.e. you're a classic PAYE person with nothing else going on) then simply decide how much you're putting in to pension, log in to HMRC personal tax account and type in what you want added to your tax code.


See this link https://www.which.co.uk/money/pensi...-pension-contributions-explained-a27f53z7qg3f

Magically your tax code will be increased and you're done.

If you do not contribute the amount you said. Simply give them a call and tell them.

I shove in everything I can...as it's tax free cash. I favour this than paying off my little remaining mortgage tbh.

Love this scheme. The rich get richer level 1.

 

[Simon]

agree. I got told this was bad advice earlier in the thread but I haven’t looked into it too hard as I have to do a SA anyway.

Also no point just piling money in if you don’t consider AA or LTA

 

[Freefaller]

Just be careful with your pension lifetime allowance (LTA) otherwise you could be hit with the tax on the other end.

That's 40k though so quite a sum that even a decent 100k+ salary won't get close (unless you're really aggressive with your sacrifice) but you're right to make a point about it.

 

[dlockers]

That's 40k though so quite a sum that even a decent 100k+ salary won't get close (unless you're really aggressive with your sacrifice) but you're right to make a point about it.

The lifetime allowance is a consideration though to be fair as £1m lifetime isn't that much when you consider higher employer contributions as you age and more of a percentage of your wealth being forcefully committed. I've got a colleague who went a bit mad in early days and has already written off more voluntarily contributions as a good idea.

 

[Freefaller]

The lifetime allowance is a consideration though to be fair as £1m lifetime isn't that much when you consider higher employer contributions as you age and more of a percentage of your wealth being forcefully committed. I've got a colleague who went a bit mad in early days and has already written off more voluntarily contributions as a good idea.

Ah fair point. I'm playing catch up as I started investing late for my pension so I'm pushing quite hard at the moment. LTA is miles away for me but again a fair comment. It's a bit of a minefield if you're not careful. I think a lot of people have been stung by HMRC bills at some point. Not that I'm earning that much for it to be an issue but I still try and maximise investment and pensions.

 

[dlockers]

Ah fair point. I'm playing catch up as I started investing late for my pension so I'm pushing quite hard at the moment. LTA is miles away for me but again a fair comment. It's a bit of a minefield if you're not careful. I think a lot of people have been stung by HMRC bills at some point. Not that I'm earning that much for it to be an issue but I still try and maximise investment and pensions.

My friend is also concerned they'll keep increasing private pension age, possibly even tie it to state retirement minus x

 

[Freefaller]

My friend is also concerned they'll keep increasing private pension age, possibly even tie it to state retirement minus x

Oh please don't say that!

 

[shadow_boxer]

Between £50k and £100k I don't think generally there is a huge amount to worry about especially if on PAYE that hasn't already been mentioned. Pensions, salary sacrifice schemes/benefits, child benefit would be main ones.

 

[GSXRMovistar]

My friend is also concerned they'll keep increasing private pension age, possibly even tie it to state retirement minus x

That's my concern, other than the big financial dip that that has hit for the last six months my pension was looking pretty healthy, just concerned that the government will interfere to the point where I won't be able to make use of it before I'm too old.