Income Tax - 60% Trap

Halscot

Hi there,

I've recently changed jobs and i'm now in the fortunate position of have earnings over £100,000

Through research online i've discovered this puts me in scope of the 60% tax trap due to loss of my tax free personal allowance.

What i'm trying to understand is the best way to mitigate the impact via an increase in my pension contributions via salary exchange.

The primary concern is my annual bonus, typically 20% of my base salary, paid annually in June.  

Is there a straightforward way to work out how much to increase my monthly pension contributions, and when? so as to avoid a change in my tax code.

I guess I would need to make an assumption the full 20% bonus is paid? so...

• The full bonus of 20% will be received in June
• Divide the above amount by 12
• Increase my monthly pension contributions (salary exchange) by the same, therefore keeping my earnings under £100k...?

The questions I have:

1. Is the above correct, or do i need to take into account anything else?
2. How frequently do HMRC recalculate your tax code?  The concern being if there is a spike in my earnings for June (bonus payment) do they they immediately adjust my code for the remainder of the tax year
3. Based on the above should I be increasing my pension contributions now by the 20% / 12 ? so when I go into the next tax year my projected yearly income will be less than £100k even when the bonus is paid?
4. Is there an online calculator that can provide a real life worked example to ensure everything is as accurate as possible?  also happy to pay for financial advise if it's worthwhile

As an additional point, I live in Scotland.  I highlight this not because of the rugby result at the weekend but due to the slight differences in the tax arrangements :-)

First time poster so any help would be greatly appreciated.  Hopefully i can reciprocate in the future.

Many thanks!

Dazed_and_C0nfused

1.  The Personal Allowance is based on your adjusted net income, not just your taxable income.  So you need to look at the whole picture, not just your pay.

2.  No.  They will issue a new tax code when necessary but as I understand it earning over £100k isn't in itself something that results in a new tax code i.e. you will be playing catch up the first tax year this happens.  Irrespective of that your tax code is simply a provisional attempt to collect the correct amount of tax, the actual tax owed (or overpaid) is established by completion of your Self Assessment return.

3.  Ultimately pension contributions paid in the current tax year will be have no bearing on the tax due for 2022:23.  But they may be very tax efficient anyway in the current tax year assuming you are a higher rate taxpayer.

4.  Listentotaxman is a popular online tax calculator however any calculator is only any good if you fully understand them and pension contributions are often a problematic area as there are multiple different methods of contributing, all of which work in slightly different ways for tax purposes.

Are you going to make all pension contributions via salary sacrifice?

pjread

Many employers will facilitate an ad-hoc salary sacrifice if it's in relation to a bonus - I'd suggest asking, as that'd keep things simple and avoids irritation if the bonus isn't paid 100% for whatever reason.

re: #2, they can do - I'd suggest logging in to your tax account on gov.uk and giving them an estimate for the year (e.g. 100k if that's what you intend to sacrifice down to) and they should give a code based on that (i.e. with full PA). 

NorthYorkie

I think, on your income, you can (and should) afford to pay for advice from a professionally qualified tax adviser - go to www,tax.org.uk or www.att.org.uk to find one locally.

"Free advice is worth as much as you pay for it"

pjread

If it's purely employment income as an employee on PAYE I'm not sure how much a tax adviser will be able to add, but certainly no harm (worst case, someone to sue if the advice is wrong... )

Personally I'd set salary sacrifice to hit 100k (including any p11d benefits like private health), then ask the employer if they can directly salary sacrifice the bonus. That seems straightforward enough to avoid paying for advice to me, but if it's any more complex (self employed income etc) then sure go talk to someone professional.

spock007

I will find myself in a similar scenario next year. 
My previous year's pension entitlement are all full. 
I am already contribution the maximum amount. 
I already utilise salary sacrifice (and note I am PAYE). 

Even after pension contribution, thanks to a one off bumper RSU and share-price gains, I am looking at circa (post-pension contribution) £129k gross. This is a one-time-only event and I will never see the likes again. 

I have heard of VCT/EIS and onshore bonds but I am not sure they would be able to help in this scenario and seem complicated. Ultimately, I think I just have to "pay the 60% tax" (I know it is not a real tax but is erosion of personal allowance). All my life I have earned vastly below this (emphasis on vastly). Having scoured the internet I just don't see a way around it.

Dazed_and_C0nfused

VCT and EIS won't reduce your adjusted net income, which is what the Personal Allowance is based on.

They can reduce your overall tax liability but not in the way you were hoping.

They can also be high risk investments so be careful not to let tax override all other considerations.

Jeremy535897

Realistically there is only one way out of this.

Start a new trade that needs some plant and machinery (even a van). It has to be a commercial trade carried on with a view to profit, but many trades have low profits in the first year. Assuming that the cost of the plant exceeds any profit, you claim the difference as a loss (don't use the cash basis as you cannot then claim a loss against other income). That's putting it very simply, and there are a whole load of non-tax considerations (liability, insurance, premises etc). You should take proper advice

It's easier with a spouse, particularly if they have low income, because you can form it as a partnership, take 99% of the loss in year one, and give 99% of the profit to your spouse when the business makes a taxable profit.

newbridge

Jeremy535897 said:

Realistically there is only one way out of this.

Start a new trade that needs some plant and machinery (even a van). It has to be a commercial trade carried on with a view to profit, but many trades have low profits in the first year. Assuming that the cost of the plant exceeds any profit, you claim the difference as a loss (don't use the cash basis as you cannot then claim a loss against other income). That's putting it very simply, and there are a whole load of non-tax considerations (liability, insurance, premises etc). You should take proper advice

It's easier with a spouse, particularly if they have low income, because you can form it as a partnership, take 99% of the loss in year one, and give 99% of the profit to your spouse when the business makes a taxable profit.

i believe that would be as soletrader? but would it be llc when partnering with wife?

thx

[Deleted User]

newbridge said:

Jeremy535897 said:

Realistically there is only one way out of this.

Start a new trade that needs some plant and machinery (even a van). It has to be a commercial trade carried on with a view to profit, but many trades have low profits in the first year. Assuming that the cost of the plant exceeds any profit, you claim the difference as a loss (don't use the cash basis as you cannot then claim a loss against other income). That's putting it very simply, and there are a whole load of non-tax considerations (liability, insurance, premises etc). You should take proper advice

It's easier with a spouse, particularly if they have low income, because you can form it as a partnership, take 99% of the loss in year one, and give 99% of the profit to your spouse when the business makes a taxable profit.

i believe that would be as soletrader? but would it be llc when partnering with wife?

thx

No. A partnership, for tax purposes, is simply two sole traders sharing profits in whatever proportion they see fit. There are other legal considerations (joint and several liability, for example) but the point remains. Not sure how Ltd status comes into play.