Annual Allowance £40,000

Albermarle

but it is an astonishingly good deal for higher earners that can afford to lock the money away for the future...

Some posters complaining about the £40K annual allowance or the £1million + lifetime allowance , seem to forget that higher rate tax relief is basically a free bonus for higher earners ( which I take advantage of ) 

mither_2

ratechaser said:

mither_2 said:

ratechaser said:

georgehere said:

ratechaser:

work out how much NI you have contributed and consider the picture as a whole before you start feeling too guilty

Oh certainly, and I vaguely recall the howls of rage when the uncapped 1% (and subsequently 2%) NI charge first came in - because we all know it's just income tax by another name. 

But there's 2 sides to this... 

Firstly in relative terms, I have paid a pretty hefty chunk compared to others that will end up getting the same pension and NHS provision - and as I also have private healthcare (the cost of which is paid for by my employer but which I am taxed on as a benefit in kind), I'm actually  using the NHS less than many others. So I could feel aggrieved for paying more than my 'fair' share.

However, secondly... in absolute terms, if my 30 years of NI cons, which started off sub-£100 a year, and only got really big about 10 years ago, were used to fund a D.C. pension, I doubt they would get me an annuity nearly as big as what my state pension will ultimately provide for. And yes I know I will keep on paying NI, although hopefully for not many more years! 

So I can't grumble all that much...

I have a query on Private Healthcare as a Benefit in Kind and not sure where to put it so now seems like a good place. 
My salary is £105k per year therefore I get no income tax relief. I pay £100 per month for my BUPA care totalling. Fortunately I rarely ever use the cover and so was thinking of cancelling it. 
If I cancelled the policy would I save this money or would it just be taken up in tax payments?  
 

Not really my area of expertise but I understood private healthcare to be a taxable BIK - I'm sure I end up with it reflected as notional income on my pay statements, but to be honest, it's not something I've paid a lot of attention to. 

In any event, you really do need to think about at least ensuring your taxable income is brought down to below the 100k mark (e.g through pension contributions) so you're not ending up with an effective 62% tax rate on that "just over 100k" slice...

As to your other post, yes 40k is the maximum annual allowance, but in reality I paid 55k into pensions last year as a result of using up some prior year carryover. And between tax relief and employer contributions, that 55k only cost me the equivalent of about 15k in net pay. Not all tax relief I have to stress, but it is an astonishingly good deal for higher earners that can afford to lock the money away for the future...

Thanks but how is it 62% Are you including National Insurance Payments on this? If the top rate of tax is 45% how do you get to 62%?  

kuratowski

Between £100,000 and £125,000 the personal allowance is withdrawn at a rate of £1 for every £2 of income.  This creates a marginal tax rate of 60% (i.e. the 40% higher rate + 40% / 2 for the additional tax paid on losing the personal allowance).  Plus NI at 2%, the total marginal rate on earned income is 62%.

Malthusian

Albermarle said:

but it is an astonishingly good deal for higher earners that can afford to lock the money away for the future...

Some posters complaining about the £40K annual allowance or the £1million + lifetime allowance , seem to forget that higher rate tax relief is basically a free bonus for higher earners ( which I take advantage of ) 

This is largely true, especially if you can get tax relief at 40% and pay income tax at 20% on the way out, but in between income tax, NI, Inheritance Tax, and whatever wizard wheezes the Government cooks up in the next 30 years, higher rate taxpayers have to take their free bonuses where they can find them.

If the tax system was full of free bonuses for higher rate taxpayers, the top 1% wouldn't pay 30% of the tax (etc).

Tax relief at 40% and income tax at 20% is not free money, but the effect of spreading income across working years and retired years instead of receiving all of it and paying tax on all of it in the working years. This is the whole idea behind pension tax relief, even if politicians pretend not to understand it. 

There is no particular reason that someone who earns £300,000 over the space of 5 years should be taxed more heavily than someone who earns £300,000 over 10 years just because the first person worked harder for a shorter time. Thanks to pension tax relief the first person can put half their £300,000 into a pension and pay the same rate of tax as the second by deferring the year in which they get their hands on it.

Malthusian

kuratowski said:

Between £100,000 and £125,000 the personal allowance is withdrawn at a rate of £1 for every £2 of income.  This creates a marginal tax rate of 60% (i.e. the 40% higher rate + 40% / 2 for the additional tax paid on losing the personal allowance).  Plus NI at 2%, the total marginal rate on earned income is 62%.

67%. Don't forget employer's NI.
For you to get £10,000 in your pocket, the employer has to pay you £26,316 on which it pays £3,631 employer's NI. So in total you receive £10,000 from gross pay of £29,947 for a 67% marginal tax rate.

mither_2

Malthusian said:

kuratowski said:

Between £100,000 and £125,000 the personal allowance is withdrawn at a rate of £1 for every £2 of income.  This creates a marginal tax rate of 60% (i.e. the 40% higher rate + 40% / 2 for the additional tax paid on losing the personal allowance).  Plus NI at 2%, the total marginal rate on earned income is 62%.

67%. Don't forget employer's NI.
For you to get £10,000 in your pocket, the employer has to pay you £26,316 on which it pays £3,631 employer's NI. So in total you receive £10,000 from gross pay of £29,947 for a 67% marginal tax rate.

Thanks for the explanation

mither_2

Malthusian said:

Albermarle said:

but it is an astonishingly good deal for higher earners that can afford to lock the money away for the future...

Some posters complaining about the £40K annual allowance or the £1million + lifetime allowance , seem to forget that higher rate tax relief is basically a free bonus for higher earners ( which I take advantage of ) 

This is largely true, especially if you can get tax relief at 40% and pay income tax at 20% on the way out, but in between income tax, NI, Inheritance Tax, and whatever wizard wheezes the Government cooks up in the next 30 years, higher rate taxpayers have to take their free bonuses where they can find them.

If the tax system was full of free bonuses for higher rate taxpayers, the top 1% wouldn't pay 30% of the tax (etc).

Tax relief at 40% and income tax at 20% is not free money, but the effect of spreading income across working years and retired years instead of receiving all of it and paying tax on all of it in the working years. This is the whole idea behind pension tax relief, even if politicians pretend not to understand it. 

There is no particular reason that someone who earns £300,000 over the space of 5 years should be taxed more heavily than someone who earns £300,000 over 10 years just because the first person worked harder for a shorter time. Thanks to pension tax relief the first person can put half their £300,000 into a pension and pay the same rate of tax as the second by deferring the year in which they get their hands on it.

Thanks to pension tax relief the first person can put half their £300,000 into a pension and pay the same rate of tax as the second by deferring the year in which they get their hands on it.
How does this work? If I pay into my pension I get 20% tax relief I think on anything over the £40k tax free allowance? 
But when I then draw it out in my retirement I then need to pay tax on it again? I thought it was only the first 25% of the pension that could be drawn tax free?

Malthusian

mither_2 said:

Malthusian said:

Albermarle said:

but it is an astonishingly good deal for higher earners that can afford to lock the money away for the future...

Some posters complaining about the £40K annual allowance or the £1million + lifetime allowance , seem to forget that higher rate tax relief is basically a free bonus for higher earners ( which I take advantage of ) 

This is largely true, especially if you can get tax relief at 40% and pay income tax at 20% on the way out, but in between income tax, NI, Inheritance Tax, and whatever wizard wheezes the Government cooks up in the next 30 years, higher rate taxpayers have to take their free bonuses where they can find them.

If the tax system was full of free bonuses for higher rate taxpayers, the top 1% wouldn't pay 30% of the tax (etc).

Tax relief at 40% and income tax at 20% is not free money, but the effect of spreading income across working years and retired years instead of receiving all of it and paying tax on all of it in the working years. This is the whole idea behind pension tax relief, even if politicians pretend not to understand it. 

There is no particular reason that someone who earns £300,000 over the space of 5 years should be taxed more heavily than someone who earns £300,000 over 10 years just because the first person worked harder for a shorter time. Thanks to pension tax relief the first person can put half their £300,000 into a pension and pay the same rate of tax as the second by deferring the year in which they get their hands on it.

Thanks to pension tax relief the first person can put half their £300,000 into a pension and pay the same rate of tax as the second by deferring the year in which they get their hands on it.
How does this work? If I pay into my pension I get 20% tax relief I think on anything over the £40k tax free allowance? 
But when I then draw it out in my retirement I then need to pay tax on it again?

In the absence of tax deferral on pension money, the guy who earns £300,000 in 5 years has an income of £60,000pa so he'll pay 40% tax (he's above the 50k threshold). The guy who earns £300,000 in 10 years has an income of £30,000pa so he'll pay 20% tax. Both have earned exactly the same amount of money but the guy who earned it faster pays a higher rate of tax purely because he worked harder or smarter.

This is inequitable so we allow the harder/smarter working guy to pay half his income into a pension and draw it out over the 5 years in which he's not working. Now he also has a taxable income of £30,000 a year so pays 20% tax.

Ignore tax free cash and other complications as it's beside the point. This is about the principle behind pension tax relief and why it is not a bung for rich people, regardless of politicians and journalists pretending not to understand this. It is to allow income to be deferred until and taxed in the year in which you get to spend it.

(There is no £40,000 tax free allowance. I assume you mean you get 20% tax relief under the £40,000 annual allowance.)

Moving away from the pure principle, people who will be 20% taxpayers both before and after retirement can still benefit thanks to a) 25% tax free cash b) the possibility of paying 0% tax when they draw the pension if they have spare personal allowance c) salary sacrifice if available (this means you get relief on National Insurance on the way in but don't pay NI on the way out).

They're unlikely to benefit as much as higher rate taxpayers, of course, but as discussed above, that's how it's supposed to work. Even if it's taboo to acknowledge that tax breaks are of more benefit to people who pay more tax, i.e. people who have more money.