Pros and cons of being a higher-rate tax payer

onlyroz

It is possible that after April this year I will creep into the higher rate tax bracket unless I do something like up my pension contributions. Also, it is possible that from September I will no longer need my childcare vouchers, which would push me up even higher. I want to know what are the pros and cons of being a higher rate tax payer.

My understanding is that if I'm in the higher tax bracket then my pension contributions are worth more, but I will get reduced returns on any savings and investments. Is this correct? And could I offset the savings hit by moving them into my husband's name?

Are there any other factors to consider? Thanks in advance.

bryanb

Moving the savings would help, ISA's too. The main plus point is that you are paid more, although just creeping in to 40% is not going to help much depending on child benefits.

onlyroz

I would be below the £50k child benefit limit but probably just above the 40% threshold. I basically want to know if there is any major downside to being a higher rate tax payer, other than making sure I don't have to much in savings in my own name, and if there are any other pluses apart from the higher value of my pension contributions.

antrobus

onlyroz wrote: »

... And could I offset the savings hit by moving them into my husband's name?....

Yes.

But that would be tax avoidance, and therefore wrong. At least that's what people said when Philip Green did it.:)

CKhalvashi

antrobus wrote: »

Yes.

But that would be tax avoidance, and therefore wrong. At least that's what people said when Philip Green did it.:)

Although perfectly legal, as there's no tax on gifts between spouses.

CK

onlyroz

The money is "our" money, obtained through a remortgage of our jointly owned property, but currently sits in a savings account in my name. I don't see the difference between that and it sitting in a savings account in his name.

CKhalvashi

onlyroz wrote: »

The money is "our" money, obtained through a remortgage of our jointly owned property, but currently sits in a savings account in my name. I don't see the difference between that and it sitting in a savings account in his name.

Legally, and IMO morally speaking, there's no difference at all in this.

CK

sunshinetours

Don't worry there isn't and its perfectly legitimate to do so. Certain tax exemptions are allowed between husband and wife (very few these days) so using those that are allowed to minimise your tax bills is perfectly legitimate.

Higher rate tax relief on pension contributions is a benefit certainly and obviously you only pay higher rate tax on your top slice of income. So unless it affects any credits being paid significantly there is no real downside no. Its only when you get above £50k either one of you, that some nasty marginal rates can appear due to child benefit withdrawal.

onlyroz

OK thanks for the advice - sounds like I don't need to do much and it's OK to slide into the 40% band. If it looks like the child benefit might be affected in future years then I'll re-assess, although arguably if I was earning £50-60k and both the kids were at school (at the moment I have one in nursery) then I would have less justification for wanting to keep the CHB.

CKhalvashi

onlyroz wrote: »

OK thanks for the advice - sounds like I don't need to do much and it's OK to slide into the 40% band. If it looks like the child benefit might be affected in future years then I'll re-assess, although arguably if I was earning £50-60k and both the kids were at school (at the moment I have one in nursery) then I would have less justification for wanting to keep the CHB.

As long as you don't go over £60k/£100k between you, you'll be fine.

We use similar rules to keep my earnings below £150k (another tax bracket), and when we marry later this year, it's going to become a little easier.

CK

sunshinetours

£50k for either of you is the magic number not £60k. Gradual withdrawal of child benefit if either of you over £50k creates the large marginal rates I mentioned and highlights the inequalities now in the system for "middle" earners