40% Tax Liability

ChopperST

Afternoon all,

Would be greatful of people's opinions on how best to organise my finances to minimise my tax liabilities.

I'm employed full time in the NHS and earn circa £45,000 a year from two posts. I also have a self employment which earns me between £6-£10k a year.

Obviously some of my income is exposed to the 40% tax bracket which is a bit of a sickener to think so much of my extra hard earned goes straight to the tax man.

I have a pension which I have been paying into since age 21 (now 33).
Cash ISA fully subscribed
S&S ISA partly funded this year with a FTSE All Share Tracker
Married (Wife is 20% tax payer)
No dependants
Own own home with a mortgage at 85% LTV

Is the most efficient thing to do to increase my pension contributions to bring me below the 40% threshold? Thing is I'm a little wary what could happen to my pension fund 50 years into the future. Is there any alternative investment anyone that could be suitable in my situation or is the increase in pension contributions the only real option?

Mods feel free to move this to the tax section if it is more appropriate.

CLAPTON

two main ways of reducing tax payable

pension contributions
charity donations

martinsurrey

ChopperST wrote: »

Afternoon all,

I'm employed full time in the NHS and earn circa £45,000 a year from two posts. I also have a self employment which earns me between £6-£10k a year.

Obviously some of my income is exposed to the 40% tax bracket which is a bit of a sickener to think so much of my extra hard earned goes straight to the tax man.

I think its funny that you find it "Sickning" to pay 40% tax, when the reason you have to is becuase you get given £45k of tax that somone else has paid!

consider your self lucky that not everyone thinks like you, or you might find your £45k job at risk...

lisyloo

I find tax avoidance perfectly logical and normal.
It may be difficult not to bite - but I'd ignore the comments above - their atttitude is their problem not yours - possibly jealousy - a lot of it about.

I looked into this recently.

Your simplest option is pension contributions. As you rightly point out there are downsides. You cannot take a pension until at least 55 and even then it's subject to whatever the prevailing rules and tax rates are at the time.
To put it simply - This is the price you pay for the tax break.

There are other options.
One is CITR (community investment trusts). You get tax relief on these and the return is about 5% but I believe you need to tie the money up for 5 years and it is at risk. It invests in small businesses that might find it hard to get loans through normal banks. They have a good track record but there is no guarantee against capital loss.

There are other vehicles like RITs and personal asset trusts, venture capital trusts (VCTs) etc. but nothing really for what I'd call "unsophisticated investors".

So basically if your not a sophisticated investor, then pensions are pretty much the only option and I'm afraid the downsides are the price you pay for the tax break.

Thing is I'm a little wary what could happen to my pension fund 50 years into the future

What exactly do you mean by this?
Do you mean the valus could go down?
Over the long term it should go up, as you approach retirement you should gradually move to safer inmvestments so you don't find yourself retiring on "black monday", so you shouldn't have to worry about this if you are sensible.
Or do you mean the government could change the rules at any time?
Yes they could - bottom line is there is nothing we can do about that.

ChopperST

martinsurrey wrote: »

I think its funny that you find it "Sickening" to pay 40% tax, when the reason you have to is because you get given £45k of tax that someone else has paid!

consider yourself lucky that not everyone thinks like you, or you might find your £45k job at risk...

Thank you for your helpful and well spelt reply, which I have corrected for other forumites so its comprehensible. If would like to continue the discussion via a private message then feel free to do so. Otherwise please leave the thread clear to those who wish to provide a helpful and constructive reply.

I find it quite objectionable that because I work in the public sector I am not allowed to consider my tax liabilities like everybody else in this country. You sir do not know what job I do nor the effort I put in to earn my wage and how many years of study and sacrifice it took me to achieve my current occupation and salary. I may well be the doctor that is on duty the day you get carried into A&E and end up saving your life.

If you read my post more carefully an element of my income comes from self employment and entrepreneurialism, which I do via evening and weekend work, again sacrificing my time and working long hours to earn extra funds to support my family for which I want to provide a future for.

Like every other citizen of this country I pay my NI and tax contributions as required by the law and I gladly do so, however the laws of this country allow me to distribute my earnings in such a way that I only pay tax on certain elements of that income.

I find this constant bashing of public sector workers quite despicable to be honest, perhaps you are trying to be divisive, I don't know. Also I don't "get given" I earn my wage.

ChopperST

@ lisyloo

Thank you for your considered reply.

My main concern is that 50 years into the future my pension may well not be what it is today and I'd like to diversify my investment portfolio from solely a government backed pension scheme. I also envisage that there is a good chance I may be 68 before I see any of my pension fund.

I will look into the other options in more detail. Thanks again.

martinsurrey

It’s not the avoidance of tax that I was anti, it was the attitude that it was sickening to pay 40% tax, and that is true for anyone public or private sector.

And it’s not jealousy, I pay 40% as well, do I like it, no, do I find it sickening, no.

But on to topic, pension contributions are the best way of keeping your income down, (which is both administratively easy and has a manageable risk profile), or you could incorporate your side line income and pay corporation tax, you wouldn’t have as easy access to the funds (as they would be wrapped up in the company), but it would shield the income until you decided to draw it. Your new LTD Company could employ your wife and pay her a wage, and she could own some of the shares and take the dividend, both of which would reduce your tax liability. Although the administrative burden of a LTD company would probably out weigh the gain.



So stick with pension IMO., and you can open a private one to keep it seperate from your day job.

edit for


By the way, if you are going to get on your high horse, make sure your posts don’t contradict yourself on my main point.

ChopperST wrote: »

is a bit of a sickener to think so much of my extra hard earned goes straight to the tax man.

ChopperST wrote: »

Like every other citizen of this country I pay my NI and tax contributions as required by the law and I gladly do so,

Sickening and gladly are hardly the same.

opinions4u

Paying down the mortgage is an option to consider.

Lower LTV will open up cheaper remortgage options in future.

martinsurrey

opinions4u wrote: »

Paying down the mortgage is an option to consider.

Lower LTV will open up cheaper remortgage options in future.

The overpayments would come out of post tax income; OP is interested in minimizing tax.

The risk profile on almost every tax deductable scheme is far worse than pension contributions (Which have a fairly controllable risk profile through fund and investment choice), and I wouldn’t recommend them to anyone but people who can afford to lose the lot.

gadgetmind

ChopperST wrote: »

Is the most efficient thing to do to increase my pension contributions to bring me below the 40% threshold? Thing is I'm a little wary what could happen to my pension fund 50 years into the future. Is there any alternative investment anyone that could be suitable in my situation or is the increase in pension contributions the only real option?

Pension is about the only game in town, I'm afraid. This will avoid the tax and also NI if you use salary sacrifice.

You may also be able to use sal sac for cycle to work, car parking, and a few other bits and bobs, but it's all small beer.

gadgetmind

BTW, I also find it bewildering that someone would begrudge someone in the public sector a perfectly reasonable salary or object to them trying to avoid paying a huge wodge of tax by saving for their old age,