Tax - Wheres the incentive to earn more

[Dr House]

Because E-NI is £12.5k your taxable pay is just under £100k = 30h free
I was not aware you get 15h if your on over 100k but the point still stands if your on over 100k (112.5k as a contractor) its less and less attractive to work more.

 

[Surveyor]

The system is quite broken, a parent with a 3-year-old as a contractor (inside IR35)

Total income £112,500 = take home £66,700 plus get 30h free child care (value £11k pa)

work full time

Total income £165k, take home pay is £87,800 loss of free child care makes take home £76,800 but because you are at work more you need to pay full-time nursery which is £22,800 pa so true take home £65 000.

So there is no incentive to work past £112k.

How did you arrive at your take home figures and why do you assume the person on £165,000 is at work more than the person on £112,500?

Because E-NI is £12.5k your taxable pay is just under £100k = 30h free
I was not aware you get 15h if your on over 100k but the point still stands if your on over 100k (112.5k as a contractor) its less and less attractive to work more.

You're not eligible for the 30 free hours if your ‘adjusted net income’ is over £100,000. Your calculation doesn't seem to be ‘adjusted net income’.

 

[Dr House]

How did you arrive at your take home figures and why do you assume the person on £165,000 is at work more than the person on £112,500?



You're not eligible for the 30 free hours if your ‘adjusted net income’ is over £100,000. Your calculation doesn't seem to be ‘adjusted net income’.

I was not really talking about 2 different individuals, what I am saying is that it's worth working fewer hours (assuming this is an option which it is in my line of work) as the difference in take-home pay is not that much for doing substantially fewer hours.

Given that you pay your own employers NI, your adjusted net income would be £100k as 12.5k went into employers NI leaving a taxable income of £100k assuming you do not have other deductions such as a pension.

 

[Surveyor]

I was not really talking about 2 different individuals, what I am saying is that it's worth working fewer hours (assuming this is an option which it is in my line of work) as the difference in take-home pay is not that much for doing substantially fewer hours.

Given that you pay your own employers NI, your adjusted net income would be £100k as 12.5k went into employers NI leaving a taxable income of £100k assuming you do not have other deductions such as a pension.

You can put up to £40k/year into a pension which is deducted from your taxable income to arrive at your adjusted net income. A significant benefit gained over restricting your hours and pay to £112.5k.

 

[Simon]

I was not really talking about 2 different individuals, what I am saying is that it's worth working fewer hours (assuming this is an option which it is in my line of work) as the difference in take-home pay is not that much for doing substantially fewer hours.

Given that you pay your own employers NI, your adjusted net income would be £100k as 12.5k went into employers NI leaving a taxable income of £100k assuming you do not have other deductions such as a pension.

For your scenario with a 3 yr old and ignoring the free 15hours you get and the fact you work longer hours as permie and have to pay £2k a month child care?! Yes


I don’t think everyone else is in that place. Tbh 100-124k is the ‘worse area’ as that’s when your tax free allowance erodes.

Still, for same hours you are going to take 125k over 112k aren’t you ! So saying no point over 112k seems a bit specific to you

 

[dlockers]

The system is quite broken, a parent with a 3-year-old as a contractor (inside IR35)

Total income £112,500 = take home £66,700 plus get 30h free child care (value £11k pa)

work full time

Total income £165k, take home pay is £87,800 loss of free child care makes take home £76,800 but because you are at work more you need to pay full-time nursery which is £22,800 pa so true take home £65 000.

So there is no incentive to work past £112k.

You're missing a trick man...anything over 100k whack straight into your pension. Retire early.

 

[Dr House]

yes, but that only kicks the problem another £40k up the road assuming you don't have carryover from the last 3 years left. But yes I agree you can still add 40k to that number

 

[edscdk]

3% over RPI isn't an unreasonable interest rate. You're young and have probably only ever been aware of interest rates while they've been zero, so I guess thinking it is unfair is understandable.

As has been said a few times now though. If you don't want to keep paying interest for 10-20 years, then just pay it off, there are no early repayment penalties. Be thankful you're earning enough to be able to pay it off easily.

seems rather a low interest rate considering its unsecured and a lot of people don't pay it all back.. interesting to know if its a net earner or looses money.... though you could always argue better educated people are better for the economy

 

[b0rn2sk8]

This whole conversation is bizarre but where I do agree is the loans system is completely broken.

The student loan isn’t a loan on a commercial basis, think about it. Who is going to lend an 18 year old at least £27k with zero income? Most loans are in the £45k+ region.

Then think about who is taking these loans, it’s low and middle income families. Wealthy families don’t take student loans because they can afford not to. So already the loans system is geared against low and middle income families.

Then consider where most students from low and middle income families end up, news flash, it isn’t Oxbridge or even a Russell Group university where you are significantly more likely to get a very good job at the end further stacking the odds.

Then consider the loan and the interest rate against the earnings profile of someone at the start of their career. You get a graduate job on £25k, priority number 1 for most people is getting into the position of being able to get a mortgage on a house so they don’t end up in a rent trap their whole life. You’ll not really be paying any of that loan off for a few years via the salary tax at which point the ‘debt’ has grown to £10k+ from what you originally borrowed including the 3 years of accrued interest before you even graduate. You are already fighting a loosing battle against the ‘debt’.

These days it takes a couple (on a reasonable, above average but still middle income wage) almost all of their earnings power to get a a fairly average family home (remember this is after loan deductions). At which point there isn’t going to be much money left to start making overpayments to a debt which is still increasing because of the obscene interest rate. Someone who ends up as a middle earner (e.g. a nurse) will end up paying far more over their lifetime because they don’t have the means to pay it off early but also can’t grow their salary quickly enough or are not paying enough to quickly overcome the effect of the compound interest. In the end they end up paying well over the odds for their education. Low earners don’t pay anything at all and wealthy people pay the minimal amount they can.

£50k, £60k, £70k salaries are good salaries and you’ll certainly be comfortable but context is everything, if you need to live in London or the south east to earn it then it really doesn’t go that far these days and doesn’t get you the lifestyle some people make out, particularly once you have kids.

P.S. we could have had a Norway style trillion £ sovereign wealth fund but successive governments have continually sold all of the UKs revenue producing assets over the decades instead of investing and growing them. It’s got to the point now that there is nothing left but the debt generated by our low taxation ideology. But that’s another conversation.

 

[LeMson]

Here's my plan 2 for comparison:



OP did come across quite badly and is in a fortunate position compared to an average graduate like me, but some of the responses in this thread attacking him are missing the point of how absurd the system is. I'd need to more than double my salary (although it has gone up a bit over the last year already, humblebrag) to have any hope of paying it off before the 30 years is up, which is do-able in my line of work but why shouldn't I legally arrange my finances in a way to minimise what I pay back, after the past year of acceptable, blatant corruption by the people who decide those rules?

Welp, just checked mine, I owe 40k ;( What a mad system, I'm never gonna pay this back lulz

 

[Simon]

These new student loans are scary!

You're missing a trick man...anything over 100k whack straight into your pension. Retire early.

What if you already expect to hit LTA. 55% tax then, so better to take the cash and be take at source or keep putting into pension? Tricky one but a 1st world problem

 

[dlockers]

These new student loans are scary!


What if you already expect to hit LTA. 55% tax then, so better to take the cash and be take at source or keep putting into pension? Tricky one but a 1st world problem

Yeah proper 1st world problem. The sad thing is, even at LTA and projected growth, the retirement income is pathetic if you live any longer than a handful of years

My firm makes you opt out of pension once you get very senior anyway, and all rewards are stock.

I can see why BTL is so appealing, it's the only solid investment vehicle for large amounts of cash.

 

[Simon]

Don't let Foxeye see that !

Yes BTL nice but again earnings can eat into the personal allowance. Maybe cars is the safe investment and CGT tax free!

 

[dlockers]

Don't let Foxeye see that !

Yes BTL nice but again earnings can eat into the personal allowance. Maybe cars is the safe investment and CGT tax free!

I don't need anymore encouragement to be considering that

 

[Hades]

This whole conversation is bizarre but where I do agree is the loans system is completely broken.

The student loan isn’t a loan on a commercial basis, think about it. Who is going to lend an 18 year old at least £27k with zero income? Most loans are in the £45k+ region.

Then think about who is taking these loans, it’s low and middle income families. Wealthy families don’t take student loans because they can afford not to. So already the loans system is geared against low and middle income families.

Then consider where most students from low and middle income families end up, news flash, it isn’t Oxbridge or even a Russell Group university where you are significantly more likely to get a very good job at the end further stacking the odds.

Then consider the loan and the interest rate against the earnings profile of someone at the start of their career. You get a graduate job on £25k, priority number 1 for most people is getting into the position of being able to get a mortgage on a house so they don’t end up in a rent trap their whole life. You’ll not really be paying any of that loan off for a few years via the salary tax at which point the ‘debt’ has grown to £10k+ from what you originally borrowed including the 3 years of accrued interest before you even graduate. You are already fighting a loosing battle against the ‘debt’.

These days it takes a couple (on a reasonable, above average but still middle income wage) almost all of their earnings power to get a a fairly average family home (remember this is after loan deductions). At which point there isn’t going to be much money left to start making overpayments to a debt which is still increasing because of the obscene interest rate. Someone who ends up as a middle earner (e.g. a nurse) will end up paying far more over their lifetime because they don’t have the means to pay it off early but also can’t grow their salary quickly enough or are not paying enough to quickly overcome the effect of the compound interest. In the end they end up paying well over the odds for their education. Low earners don’t pay anything at all and wealthy people pay the minimal amount they can.

£50k, £60k, £70k salaries are good salaries and you’ll certainly be comfortable but context is everything, if you need to live in London or the south east to earn it then it really doesn’t go that far these days and doesn’t get you the lifestyle some people make out, particularly once you have kids.

P.S. we could have had a Norway style trillion £ sovereign wealth fund but successive governments have continually sold all of the UKs revenue producing assets over the decades instead of investing and growing them. It’s got to the point now that there is nothing left but the debt generated by our low taxation ideology. But that’s another conversation.

Completely agree. I have two kids going to university soon and it really worries me the debt burden they will take on. I genuinely don't know whether it's worth it.

 

[dowie]

Completely agree. I have two kids going to university soon and it really worries me the debt burden they will take on. I genuinely don't know whether it's worth it.

I guess it potentially depends on what they want to do. I mean if they can get into Oxbridge/London/Warwick or perhaps some of the other top research universities then it doesn't matter so much if you don't have any idea yet, you can study whatever you want and the university brand name still does the signalling just having a degree, in general, would have done a generation or two ago.

On the other hand, if you end up opting to study geography at Scunthorpe Polytechnic, and you don't want to be a geography teacher, then you might come away with not much in the way of useful skills and not much in the way of useful signalling to show you're generally smart etc. You'll have paid tens of thousands and foregone 3 years of income in order to have a not very competitive shot at some jobs that require a degree but no specific skill set and/or might well end up in a job that didn't even require one.

Likewise, I don't understand people who go to mediocre universities to study say "Accounting" - what value does that add? If you want to learn to become an accountant then there are firms and training providers who will teach you without any need to get into debt and the important thing is the professional qualification... This has become even sillier when it turns out stuff like ACCA actually qualifies you to be awarded a BSc degree part way through it anyway (from one of the better ex Polys) and part qualifies you for an MSc too - if you can't get into highly ranked university to study some subject you'll enjoy and you want to be an accountant then might as well join an accountancy firm and just study the subject professionally + get awarded degrees on top as you go...

Seems like there are so many options for flexible/part-time, evening, online study etc.. a large portion of students would probably be better off financially just getting into the workforce. I mean if someone was going to go for a more vocational degree then something like a degree apprenticeship would seem to be ideal, get paid a decent salary, no tuition fees, no debt and you're already in a reasonably well-paid job when you graduate + will have 4 years+ work experience on top too.

 

[b0rn2sk8]

Completely agree. I have two kids going to university soon and it really worries me the debt burden they will take on. I genuinely don't know whether it's worth it.

It should be a far more considered decision these days than it actually is. My advice would be to work out what they actually want to do and if there is a non-uni route then they should go for it. I would also suggest they also apply for Uni even if their is a non Uni route. It’s risky to put all your eggs in one basket and may not get their preferred option.

Non-Uni routes may be badged as an apprenticeship but don’t be fooled into thinking that means £2.50 an hour and 1 day a week at some dodgy college, it really isn’t like that anymore. Most jobs with training are badged as an apprenticeship these days, even professional stuff like accountancy. They do it because they have to pay the apprenticeship levy, they might as well claw some of that back as they meet the criteria anyway.

If they are not sure or are a bit vague about what they want to do, then I’d suggest they go to Uni if they are capable of getting a 2.1 or higher. It will open up a load of generalist grad schemes in all sorts of sectors with a degree in almost at anything.

As Dowie mentioned, accountants/audit/tax advisers take school leavers on very similar terms to graduates. It’s not just a big 4 thing either, even small local accountants run these programs. They offer a fully funded scheme which will give a school leaver one or two two full professional qualifications (those specialising in tax will do CTA on top of the normal ACA/ACCA), no debt and getting paid a good salary at the same time. It’s basically the same as the graduate course but it takes a school leaver a little longer to complete than a grad but they start 3+ years earlier so actually progress though the profession much faster. When you finish the ACCA/ACA, you can submit an optional dissertation and they’ll also give you a Bsc. Why would you bother with Uni if you could do that?

Schools push kids to go to Uni but their are other options out there but they just don’t know it (hint: there’s a good chance of getting a place on one of these with a big national/multinational firm if you are a bright and do really well out of it). The only thing schools/colleges push is UCAS applications to help their stats but it can be really quite poor advice at times.

That said I went to Uni and have an average degree but I have no doubt that the skills I gained (plus some hard work) have helped my career. I was one of the last ‘plan 1’ students, so even with a full maintenance and fee loan my debt was a fraction of a similar grad today and the interest rate is the base rate +1% (so 1.1% at the moment). It doesn’t get written off until state pension age but I’ll have paid it off in a few years without making any additional contributions.

 

[MichaelAwkward]

I can see why BTL is so appealing, it's the only solid investment vehicle for large amounts of cash.

Even BTL isn't that appealing these days - it's basically another part time job even if you pay someone else to fully manage it because agents are inept. You're only looking at a gross yield of 5%~, down to possibly less than 2% net depending on your situation. You either have to have been very lucky to buy in the right area cheaply in the first place, or leverage it into a full time business with multiple properties and even then it doesn't always work out - one bad tenant can wipe away a years profit.

 

[dlockers]

Even BTL isn't that appealing these days - it's basically another part time job even if you pay someone else to fully manage it because agents are inept. You're only looking at a gross yield of 5%~, down to possibly less than 2% net depending on your situation.

Excluding equity yes. But that's decent safe returns. With equity including there's no beating it.

BTL landlord are definitely Britain's newest version of what farmers were/still are

 

[MichaelAwkward]

Excluding equity yes. But that's decent safe returns. With equity including there's no beating it.

BTL landlord are definitely Britain's newest version of what farmers were/still are

Only if you get a good long term tenant, which are few and far between.

Sticking it in a S&S ISA in diversified index funds is safer these days, IMHO.