Higher Rate Tax - Help Please

FudgeHouse

Hi all

Over the last two years, I have ran in to the 40% tax bracket. In August 20142014 tax year I received a letter advising that I had underpaid tax by around £600 for the 2013-14 Tax Year and had the option to pay a lump sum off, or to repay via the PAYE.

I chose to pay back via PAYE and my tax code in my main job was amended accordingly from my April 2015 pay.

In the 2013-14 Tax Year I did two jobs consecutively. My main job, which provided income of around £43,000 gross (inc overtime), and weekend work which provided around £6000 gross.
It appears HMRC did not react quickly enough when I ran in to the 40% tax bracket, and hence the underpay. My tax code on my weekend work is now set at DO and so all of that income is now taxed at 40%

However, owing to a promotion in my main job I now have gross income of around £44,000 gross plus a £5000 gross car allowance - and also my weekend work which remains around £6000 gross, so total income is £55,000 gross p/a


In my main job I contribute to a company pension scheme at 8% of my gross salary (not inc the car allowance), so around £3520 is free of tax.

I am concerned about two things :

1. Reducing the tax I pay on my main income - I guess the obvious thing would be to pay AVCs in to my company pension, but to get in to the 20% tax rate I would have to pay an additional £13,000 in to the scheme per annum. Are there any other ways of reducing the amount I pay at 40%, as £13,000 payment in to the pension each year would equate to a reduction in take home pay of £7800 p/a - which I can't really afford at present.


2. I am running over the £50,000 Child Allowance limit, and understand I should pay the Child Benefit Tax Charge for the 2015-2016 financial year. Do I need to do anything about this now, or do I wait until April 2016 once all my income is properly known (I have one child).

(I'm 38 years old, married (my wife earns around £35K gross p/a), and own a property which is mortgaged in joint names)

I'd really appreciate some validation that my thinking above is correct, and any thoughts on how I can reduce my tax burden in a legal manner.

Many thanks in advance !

Pennywise

FudgeHouse wrote: »

I'd really appreciate some validation that my thinking above is correct, and any thoughts on how I can reduce my tax burden in a legal manner.

Only two ways to reduce your tax burden.

Earn less (or maybe salary sacrifice)

or

Pay into tax-efficient investments such as pensions.

Either way you end up with less money in your hand today.

Have you fully explored salary sacrifice? If you're paying for childcare for example, it's better if your employer pays for it and reduces your wage accordingly. Or how about other benefits, some of which may be tax efficient. Most larger employers have a range of salary sacrifice options for this very reason.

I think at the very least you need to do something to get your total income below £50k so as not to get hit with the child benefit clawback charge. If that means a few K into your occupational pension, then that's probably what you should do, as you'll have a high marginal tax rate on your income over £50k.

pjread

It's painful, but salary sacrifice to the pension down to 50k is almost certainly the best option. At least I hope so.

If you can manage below 50k, I've been toying with the idea of VCT's... Might be worth a look (or might be a really stupid idea but you only live once ) - but sadly these don't count against the child benefit tax, otherwise I'd have piled in already!

zygurat789

FudgeHouse wrote: »

Hi all

Over the last two years, I have ran in to the 40% tax bracket. In August 20142014 tax year I received a letter advising that I had underpaid tax by around £600 for the 2013-14 Tax Year and had the option to pay a lump sum off, or to repay via the PAYE.

I chose to pay back via PAYE and my tax code in my main job was amended accordingly from my April 2015 pay.

In the 2013-14 Tax Year I did two jobs consecutively. My main job, which provided income of around £43,000 gross (inc overtime), and weekend work which provided around £6000 gross.
It appears HMRC did not react quickly enough when I ran in to the 40% tax bracket, and hence the underpay. My tax code on my weekend work is now set at DO and so all of that income is now taxed at 40%

However, owing to a promotion in my main job I now have gross income of around £44,000 gross plus a £5000 gross car allowance - and also my weekend work which remains around £6000 gross, so total income is £55,000 gross p/a


In my main job I contribute to a company pension scheme at 8% of my gross salary (not inc the car allowance), so around £3520 is free of tax.

I am concerned about two things :

1. Reducing the tax I pay on my main income - I guess the obvious thing would be to pay AVCs in to my company pension, but to get in to the 20% tax rate I would have to pay an additional £13,000 in to the scheme per annum. Are there any other ways of reducing the amount I pay at 40%, as £13,000 payment in to the pension each year would equate to a reduction in take home pay of £7800 p/a - which I can't really afford at present.


2. I am running over the £50,000 Child Allowance limit, and understand I should pay the Child Benefit Tax Charge for the 2015-2016 financial year. Do I need to do anything about this now, or do I wait until April 2016 once all my income is properly known (I have one child).

(I'm 38 years old, married (my wife earns around £35K gross p/a), and own a property which is mortgaged in joint names)

I'd really appreciate some validation that my thinking above is correct, and any thoughts on how I can reduce my tax burden in a legal manner.

Many thanks in advance !

Gross pay £55,000 - PA £10,600 - Pension £3,520
Taxable pay £40,880 £31,785 @ 20% & £9,095 @40%.
A contribution of £7,276 into a pension will get you out of HR tax and cost you £4,365 pa as well as preserving your full child benefit which wouild otherwise have been halved.
Don't forget that when you are taxed on HR it means you lose 42% whereas on basic rate it was 32%.

By the way it was not up to HMRC to react to your total gross salary, it was up to you to tell them

purdyoaten

zygurat789 wrote: »

Gross pay £55,000 - PA £10,600 - Pension £3,520
Taxable pay £40,880 £31,785 @ 20% & £9,095 @40%.
A contribution of £7,276 into a pension will get you out of HR tax and cost you £4,365 pa as well as preserving your full child benefit which wouild otherwise have been halved.
Don't forget that when you are taxed on HR it means you lose 42% whereas on basic rate it was 32%.

By the way it was not up to HMRC to react to your total gross salary, it was up to you to tell them

I think that you may have double counted here!

As you say, the net contribution of £7276 will be grossed up to £9095 - the first 20% of relief. The additional 20% of £9095 will be claimed from HMRC and the net cost will be £9095-1819-1819= 5457 (not 7276-1819-1819=4365)

zygurat789

purdyoaten wrote: »

I think that you may have double counted here!

As you say, the net contribution of £7276 will be grossed up to £9095 - the first 20% of relief. The additional 20% of £9095 will be claimed from HMRC and the net cost will be £9095-1819-1819= 5457 (not 7276-1819-1819=4365)

No it wasn't double counting, it was just calcuilated on the wrong figure.
£7276 |X 60% = £4365

Should have been 9095 X 60% = £5457

I tghink the main point is preserving the CB, the OP doesn't say how many children they have but this could be the most significant figure.