Pension contributions at 60% marginal rate of tax

As there is no actual 60% tax rate I presume you are referring to the reduction of personal allowance over £100k.

You don't need to reduce your actual income to less than £100k for this so pension contributions are usually the most favoured route (unless you are very generous charity wise) as although your income remains above £100k you still get your personal allowance and the higher rate tax relief on the pension.

Providing you meet all the other rules etc (see recent pension thread from amc1 for a sorry tale!!)

JamTomorrow wrote: »

What would you do?

You have clearly understood the dilemma that these heinous tax rates represent. Personally, I would hold my nose and make the pension payments, and so avoid the effective 60% tax rate.

Here is my thinking (though of course you're free to reject it!):

• The likely 55% LTA excess rate is less than 60%. And you could well get away with less than 55% LTA rate. The calculation is actually 25% LTA charge and then marginal tax rate on the remaining 75%. So if you can wriggle into basic rate tax on withdrawals that comes out to 40% combined and not 55%. (The flip side, and worst case, would be if you are in the 60% band on withdrawals over the LTA. Here you pay 25% + .6 * 75% = 70% tax, ouch!, so one to definitely avoid there, then.)
• The LTA might eventually be scrapped. Perhaps not likely, at least in the shorter term, since scrapping it would be much too sensible a move for this government. But it's a faint possibility. 55% LTA tax in future is only probable, whereas the 60% effective tax on income above £100k now is definite.
• If the LTA isn't scrapped, you might to avoid LTA problems in future anyway by simply retiring early. You say that you project you will hit it at age 57. In which case, stop work at 56 or 55, live off other savings for a while and let investment growth momentum take your pension up to the LTA and then crystallise it. This is what I have done (compounded in my case by taking out FP2016).
• A pension is a useful inheritance tax shelter. This may or may not be of use to you.

All this assumes that you don't greatly value instant access on an ISA. After all, it is quite a long time to wait from age 41 until 55, 56, 57. And as already mentioned, the government definitely has it in for folk who save decent amounts into pensions (no matter how much general hot air they come up with around "encouraging pension saving"), meaning than an even more muddled pensions regime than what we have now could be on the cards for the future. Political risk indeed.

Also, as suggested above, this isn't necessarily an all-or-nothing proposition. You could split the difference. Sometimes this is a good way forwards if both of two options seem equally appealing (or equally unappealing, as is so often the case where tax is involved).

Finally, if earning over £100k/year looks like a regular possibility, consider reducing work to a four-day week. Once you add in employer's NI your general salary deductions at the margin are going to border 75% to the government and 25% to you. Basic self-respect suggests that you should reject that proposition!

In the same situation.
Frankly in 17 years the LTA rules will be unrecognisable from today, one way or another.
Do it under sal sac and it's 62% (or more if your employer will credit you with some of the saved ers NIC).


I'm maxing the pension contributions to bring my effective gross to a smidgeon under £100,000.


If you breach the LTA early, then there's nothing (under the present system) to stop you from stopping at 55 rather than 57, and hence avoiding a 55% charge.

I'm in a similar position except that I stopped contributions before 6 April 2016 in order to have the extra £250k of LTA (and PCLS if needed). My income promptly shot above £100k - nice problem to have, right enough, but a bit of a system shock when a couple of years earlier I hadn't even been paying higher rate tax and suddenly I'm looking at 62% at the margin.

For me there's a significant extra cost of putting just £1 into that pension... I could take the chance of the rules changing, but...

Still waiting for confirmation about the 55-moving-to-57 thing. My date of birth indicates that I will be caught if they transition it in to always be ten years below the State pension age, but not caught if they bring it in overnight when the State pension age reaches 67. The condoc wasn't entirely clear, and it was only a condoc and we have a different pensions minister and chancellor now. However, my IFA said assume 57 and anything else is a bonus. At 41 you will definitely be caught unless they drop the idea altogether.

My personal ideal would be a new Taxed-Exempt-Exempt system (with "old-style" pensions being closed to new contributions - lol and they can abolish the LTA if they like, too). It would be like an extra ISA allowance only with an uplift that I wouldn't otherwise get, at the cost of delayed access. It also has the advantage that it would suit younger/lower-income people better, although I'd be lying if I said that was my primary reason for liking it.