40% Tax Liability

racing_blue

I think your Q was about income tax, but looking at your overall tax burden:

4. drive a small frugal car (reduce vehicle excise duty, and tax on fuel) OR a bike ... see MrMoneyMustache.com

5. Buy stuff second hand to largely avoid VAT

6. Brew...

lisyloo

The point I was making however is that marginal tax isn't always as simple as 42%, and the marginal rate can be punitive.

Your point is correct.
I think the poster was originally posting about PAYE which is the situation most of us will find oursleves in.

I think your Q was about income tax

Yes, savings on VAT, vehicle excise duty etc. do not help with the income tax problem - but thanks anyway.

For myself I seriously considered CITR's and I'm suprised there hasn't been anymore discussion on those.

bowlhead99

lisyloo wrote: »

For myself I seriously considered CITR's and I'm suprised there hasn't been anymore discussion on those.

I'm not surprised there hasn't been much discussion, as hardly anyone is using them. From the Community Development Finance Association's website less than £9m was raised by such schemes in the whole of last year. On any graph of investment options of the billions/trillions currently invested, it doesn't even show up as noise.

It's challenging for investment institutions to deploy the capital and 5% a year relief on the invested amount (25% over 5 years) is not much of a sweetener for the investor on a risky opportunity, even if you can find the opportunity in someone offering a new issue in the first place. As noted on the website, most of the money raised by the schemes were actually from banks taking deposits in special CITR accounts. They were never easy to find and the bank still has the problem of deploying its CITR funds in a qualifying way to deliver a return, therefore needing to limit the accounts it can set up.

On a related side note, Charity Bank (which used to offer such accounts) closed their current year ISA issue within a month this April citing too much of a takeup - their loan book is fully funded (they only invest in ethical / charitable loans) and they simply don't need more deposits because they can't deploy them - or are unwilling to pay a 'competitive' interest rate to get them, because funding is very cheap at the moment.

Better than CITR in terms of tax relief for the investor is investing in a new issue by Venture Capital Trusts (VCTs). And this is a bigger market, with private equity / venture capital managers launching them all the time (or adding a new investable series on the side of an existing trust). There are some managers with good track records of making these VC investments in smaller businesses - although there are also some poorer performers that aim to get you your return by investing in safer stuff with only a nominal return after their fees but still looking OK when the tax relief is taken into account for a 40% or 60% marginal rate taxpayer.

The problem with VCTs is that you are locked in for 5 years+ to get the tax relief (which would be a double whammy if you wanted to exit early at a low valuation and lost the tax relief as well) and the investments due to their nature are high risk. For this reason they wouldn't be recommended to someone who doesn't have a decently large portfolio of mainstream investments and a high income to reslly value the relief.

So for example you would never recommend a VCT to ChopperST who only has a few grand of 40% tax 'problem' and a high LTV mortgage and plenty of pension capacity. But someone like gadgetmind with a 60%+ marginal rate, higher salary, lower pension capacity, a portfolio of existing investments and has made riskier investments before, might be using them quite happily. Not meaning to single you out gadget, just an example of when they could be used by someone who wasn't necessarily HNW but could handle some risk.

jamesd

ChopperST wrote: »

As we have an 85% LTV mortgage our rate is comparatively high to some @ 4.38% so overpaying would be a relatively cost efficient way of utilizing my income and pushing us towards the lower % LTV's.

Don't necessarily overpay the mortgage but do plan to try to get below 75% LTV at your next remortgage opportunity. The effective investment return on this can be quite high because the lower mortgage is paid on the whole mortgage balance, not just the extra equity. You might end up with a return of well over 10% on the extra money.

The planning to have children aspect is a possible spoiler because if that reduces household income it would make remortgaging harder.

When it comes to remortgage time remember also that you can balance use of credit cards to increase equity with the credit card repayment effect on affordability. You may find you can go into a remortgage with £20,000 of 0% credit card debt, pass an affordability check, and end up with a 75% LTV mortgage.

VCTs have some interesting properties. Like ISA money they are available to take out at any time, though with the requirement to repay the tax relief if it's within five years. The income is tax free, so that doesn't make the tax problem worse. But unlike a pension, you can get the 30% tax relief every five years by investing, holding, selling and reinvesting. The tax relief is capped at the income tax actually paid during the year, so about £20,000 would get all basic rate tax repaid, via a refund of £6,000 from HMRC. You will need to make a tax return in each year in which you invest in VCTs. They aren't for most people but they do have their points, being effectively very small company investments as part of a diversified mixture. You probably have too little in the way of total investments to be a good candidate to use them much. For others, they can be useful for contingency planning to provide an income or capital to live on before pension income becomes available.

Fly_Guy

Given that its your self employment that is attracting the highest marginal tax rate it might be an idea to check that you are making all viable deductions from this income stream.

I dont know what the nature of your self employment is, but assuming its a home based desk job you could potentially charge a proportion of your electric bill, internet bill, and heating costs. A new computer and/or printer, software packages, computer maintenance contracts, paper, ink, stamps stationary etc could all represent valid business expenses which would effectively reduce your income while providing household infrastructure you might otherwise have paid from post-tax income.

Just a thought....

FG

spock007

33 and £45k with self-employment income up to £10k? Wow! What job is it in the NHS and what is it you do in your spare time - teach an instrument or something? Well done!

spock007

lisyloo wrote: »

My husband is higher up the pyramid and has found himself not as employable as he thought and I can tell you that being out of work is very stressful.

+1 to that! Not that I'm in this position... but I would have to think very hard about going into management for an extra £10k or so - that's ~£500 extra a month after tax but would it really be worth it... And also, as you highlight, there are only so many top-level jobs. Think I'd rather stay technical as you always need the 'workers'.

FYI I pay a *little* extra into pension, not too much extra, and just put up with the extra 40% on the residue. I don't have 100% faith in pensions and I'd rather save that little bit more for an emigration fund.

ChopperST

Just checked in on the thread and want to say thanks to each and every one of you who has taken the time out to reply.

@ spock007 - I work a clinical and managerial role. Around 50 - 60 hours per week. I have a sideline sports medicine business providing clinical services to professional sports teams and see the general public in a private clinic.

@flyguy - I do claim my expenses against my self employment but am considering paying an accountant in January to see if they could scrutinize my return a little closer.

The mortgage point is an interesting one as we have recently moved and due to a gap in my wife's income stream we had to use 0% credit cards. The balance of these is being "stoozed" in ISA's and Flex Direct accounts. I planned to pay off the credit cards come the 0% expiry but will explore the possibility of transferring the balance to new cards come renewal and transfer the balance of the cards into the mortgage account.

Pleased to see others share my concerns regarding overpaying into my pension also.

grey_gym_sock

Nick_C wrote: »

As long as I remain a BR tax-payer, by investment income is taxable at 10%. If I move into HRT, my investment income becomes taxable at 32.5% - I would suddenly have to pay an additional £1125 pa tax on my dividends. So for example if I take a job that takes me above the HRT threshold by £2K, I will have to pay additional tax of £1965 - 98.25% marginal tax rate.

If I got a job that took me above the HRT threshold by £1900 or less, my marginal tax rate would be more than 100%

you seem to be misunderstanding how higher-rate tax works.

there isn't a salary at which you suddenly flip into higher-rate tax, and have to pay an extra £1125 tax on dividends.

it works on marginal rates. if your salary leaves you at least £5000 headroom below where higher rate tax, there's no extra tax on dividends. and your marginal rate on the salary is 32%.

if you go over that, i.e. less than £5000 headroom, but the salary alone doesn't reach higher-rate, then only part of the divdend income is subject to higher-rate tax. for this £5000 slice of salary, each extra £1 earned incurs 32p tax on the £1 extra salary, plus 22.5p higher-rate tax on £1 of dividend income which is pushed into the higher-rate band. so the marginal rate is 54.5%.

when the salary alone reaches higher rate, the marginal tax rate falls again to 42%.

54.5% marginal rate is not exactly appealing. the obvious way to reduce it is (as may have been said already) higher pension contributions. if you have access to a salary sacrifice scheme, then you'd save the full 54.5% on contributions for that slice of income. if you don't, then you'd only save 42.5% (as you'd still be paying 12% NI).

so i'd suggest looking for an employer with a salary sacrifice pension scheme, not 1 with a lower salary!

racing_blue

ChopperST wrote: »

I may well be the doctor that is on duty the day you get carried into A&E and end up saving your life.

ChopperST wrote:

I work a clinical and managerial role. Around 50 - 60 hours per week. I have a sideline sports medicine business providing clinical services to professional sports teams and see the general public in a private clinic.

I'm intrigued that you started paying into a pension scheme aged 21- presumably this was at least a couple of years before you graduated from medical school?