Should i try to stay on lower rate tax banding or onto higher?

jgallcash

I've just been offered a new job and the pay scalle is fairly wide (31-39K)

They have offered me the job starting at just under the 40% rate of income tax. I'm confident that i could negotiate up by at least £500 if not more. If I do then i will fall into the higher banding.

My question is are there any advantages / disadvantages apart from paying more tax? I think i'd be stupid not to try to negotiate as i easily have the skills/qualifications and experience.

Is there anything in particular i should be aware of if moving into the higher rate?

00ec25

It depends what your own tax code is as, with that salary range, you may not in fact ever be a higher rate payer:

Assuming you are on a standard personal tax code of 647L, then the calculation is this:
high rate tax for 09/10 starts at £37,401
tax code 647 = £6,47o per year before paying tax

therefore 37,401 + 6,470 = £43,871

your total income (ie salary plus any other sources of any form of income eg: interest from savings, investments etc) would need to be greater than £43,876 before you will pay higher rate tax

(to work it out for your own situation look at your tax code and multiply by 10 to convert it into £, eg code 301 = £3,010)

Mudd14

What you are saying is sound 00ec25 my only slight cnage is that you dont add a 5 to the end of the tax code you add a 9 for PAYE

RayWolfe

What's the problem? Perhaps you don't realise that you only pay 40% on the additional earnings above the tax free and 20% rates.

jgallcash

Ok Thanks for that RayWolfe.

I thought it was 40% of all earnings (quite a fundamental point that i got wrong there!)

Martin often discusses the higher rate of task when talking about savings accounts and ensuring you use ISA's- i'm now seeing why if you pay 40% tax on any interest earned from savings accounts.

jgallcash

Sorry, can you explain further Paul? Or point me in the right direction? I'm presuming this is a way of making earnings more tax efficient?

00ec25

OOOPS - longtime since I did it manually - tax code is actually multiply by 10 to get £value. http://www.hmrc.gov.uk/incometax/codes-basics.htm

Sorry jgall didn't cover the basics!. Once your total income is >£43,871 then you will only pay 40% on the amount over £43,871. You will pay 20% basic rate on the amount between your tax code and £43,871

Slightly simplifying it, but also worth noting, is that if you belong to a (qualifying) company pension scheme then the amount that you pay as pension contribution is deducted before you are taxed. If you can afford to do so therefore anyone earning just over the 40% limit can manipulate their pension contribution (ie increase it) to escape actually paying 40% tax, whilst also saving for a bigger pension, eg:

gross salary £46,000, tax code 647L, so in theory you would pay 40% on £2,129 , ie you'd pay £851.60 in tax. But, if you make say a total pension contribution of 6% of salary the calculation changes to:
Salary £46,000 (also known as "pensionable pay"), pension contribution (@6%) £2,760, deduct this to get the "taxable pay" ie. £46,000 - £2,760 = £43,240 so below the 43,871 limit, so even though you earn even more than the threshold you would still not physically pay 40% tax and in this example you have "earned" tax relief of £851.60, ie the amount of tax you would otherwise have paid has instead gone into your pension

as the rules currently stand you can actually pay 100% of your salary into a pension and therefore you would pay no tax at all, of course you'd also have no income to live on, but if you are close to retiring this is a common move for people these days as it ups your pension dramatically

jgallcash

Thanks Paul thats great. Makes a lot of sense.