Best Middle Class Salary To Reduce Tax

Joey122

Please bear with me!

I remember reading that there is a case when if you earn about 40K you might actually be worse off with a salary increase because of the way that tax is allocated.

Is this the case ? What are the numbers here and how they are calculated?

jem16

I can't see how you would possibly be worse off as you are only taxed at higher rate for that part of your salary that goes into the higher rate.

Joey122

I believe this is down to National Insurance contributions you have to make?

I was certain that there was a jump in the early 40's range which meant that you were worse off

jem16

Try putting different salaries into https://www.listentotaxman.com and see if there is any difference.

I would doubt you will end up with less for more salary.

mikewebs

Why not get the employer to pay the extra salary straight into your pension fund - you don't pay tax on it then- or put the extra you get into your own pension scheme that way you get to widen the basic rate tax band and thus keep you taxable income within starting rate and basic rate tax bands.

CLAPTON

Joey122 wrote: »

I believe this is down to National Insurance contributions you have to make?

I was certain that there was a jump in the early 40's range which meant that you were worse off

Lets be absolutely clear ; no, only the poor (with complicated benefits) suffer negative deduction rates ... you will be better off the more you earn.

chrisbur

Joey122 wrote: »

I believe this is down to National Insurance contributions you have to make?

I was certain that there was a jump in the early 40's range which meant that you were worse off

Far from a jump in national insurance you will get a reduction. By the time you are earning this sort of money the NI rate is down to 1%.
If you add tax and NI together you first pay 21% (10%+11%) then 32% (22%+11%) then 23% (22%+1%) and then 41% (40%+1%). None of these rates are going to cause you to be worse off. There is in fact that third band where tax and NI go down as you earn more, though I believe that this is being removed in 2009.

I think this idea stems from a wrongly held belief that the 40% tax band is applied to all earnings. In fact if you go £1 into the band it only applies to that £1.

IamNotOneOfTHEM

does this mean you are a higher rate tax payer even if you pay 40% for the extra £1?

chrisbur

IamNotOneOfTHEM wrote: »

does this mean you are a higher rate tax payer even if you pay 40% for the extra £1?

Sorry no idea, I am not even sure if the tax office define what a "higher rate tax payer" is.

olly300

IamNotOneOfTHEM wrote: »

does this mean you are a higher rate tax payer even if you pay 40% for the extra £1?

Yes.

It's all on the goverment sites.

http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/BeginnersGuideToTax/DG_4015566

I also think your original query was more rlelated to investments i.e. share dividends and interest on savings . If you are in such a position then you would probably take legal measures to avoid paying the extra tax.

mikewebs

Here's how the tax works (I don't know about NI):

You earn £40,000 p/a

Take of your personal allowance of £5,035

Therefore your Taxable income is £34,965

Then:

First £2150 is taxed at 10% £215.00

Next £31150 is taxed at 22% £6,853.00

Finally £1665 is taxed at 40% £666.00

Total tax liability for the year £7,734.00

This is a very basic example but shows how the tax works anything above the £33,300 taxable income (after your personal allowance is taken off) will render you liable to 40% tax - but you can extend the basic rate (the band in which tax is paid at 22%) by choosing to donate by gift aid or put money into your personal pension thus reducing the amount that will be hit by the 40% tax. (I think this is right) Remember that income tax is worked out on your Non savings Income first then on Savings income and then Dividend income. So if you earn £40,000 you can still be hit for a tax bill even if you PAYE because interest on savings (except ISAs) is usually taxed at basic rate (20%) and dividends at basic rate of 10%. You then have to pay the difference between the basic rate and the higher rate tax on yur savings and dividend income.