Earning 107k trying to get my head around 60% tax and what to do

devends

I've just started earning 107k, I was previously under 100k.

I've tried to get my head around everything, terminology etc.. so forgive me for being stupid, my excuse is I work in a creative industry and don't have a head for maths!

From what I've read, I think basically the idea is that I should pay more into my workplace pension via salary sacrifice to get my income to 100k (or should it be just under 100k?) as a way to pay less tax and so effectively earn more in the end?

That is to say that on 100k I would take home less a month than on 107k but when you add how much I've put into the pension that is taxed less than it would as not being put into pension, it is more?


Maybe if someone could show me the maths visually comparing 107k a year compared to 100k a year but with paying more into my pension it might make things clearer goes much better off I would be a month.

Hope I made some kind of sense.

Jeremy535897

If you receive the extra salary of £7,000 the effective tax/NIC rate in England is 62% (63.25% from 6 April 2022). That means you take home an extra £2,660 after tax and NIC (£2,572.50 next year).

If you make a salary sacrifice of £7,000 you are £2,660 worse off, but your pension scheme is £7,000 better off, as your employer adds that amount to it.

Dazed_and_C0nfused

Firstly you need to read up on "adjusted net income".  That is what your Personal Allowance, normally £12,570, is based on and it can be a completely different figure to your taxable income.

Although unlikely to be very realistic, for simplicity we'll say your adjusted net income and taxable income are both £107,000.

As a result your Personal Allowance is reduced by £3,500 to £9,070.

So you are taxed,
£9,070 covered by Personal Allowance (no tax)
£37,700 taxed at 20%
£60,230 taxed at 40%


Or you sacrifice £7,000 into your pension and have adjusted net income and taxable income of £100,000

So you are taxed,
£12,570 covered by Personal Allowance (no tax)

£37,700 taxed at 20%
£49,730 taxed at 40%

Plus you have £7,000* more in your pension fund
*there is no pension tax relief with salary sacrifice as they are employer contributions

All of the above is where you use salary sacrifice.  If you were to make personal contributions to a SIPP or personal pension the figures would be completely different.

[Deleted User]

With respect, if you are earning £107k a year you can afford to pay for financial advice from someone qualified to give it. He/she can assess your overall financial position; your longer-term objectives and your attitude to risk. Poor financial advice can prove to be very expensive if you get it wrong. 

pred02

[Deleted User] said:

With respect, if you are earning £107k a year you can afford to pay for financial advice from someone qualified to give it. He/she can assess your overall financial position; your longer-term objectives and your attitude to risk. Poor financial advice can prove to be very expensive if you get it wrong. 

A silly question but what is a good place to find a financial advisor? Thanks

[Deleted User]

pred02 said:

[Deleted User] said:

With respect, if you are earning £107k a year you can afford to pay for financial advice from someone qualified to give it. He/she can assess your overall financial position; your longer-term objectives and your attitude to risk. Poor financial advice can prove to be very expensive if you get it wrong. 

A silly question but what is a good place to find a financial advisor? Thanks

Google independent financial advisor in your area?

Grumpy_chap

pred02 said:

A silly question but what is a good place to find a financial advisor? Thanks

The best way is to use personal recommendation, whether the need is for a financial advisor (IFA) or for an Accountant.  It seems as though the OP, based upon the question posed, would really need an Accountant.

kimwp

OP, you need to bear in mind the pension annual and lifetime limits regarding tax and also what tax you will pay when you draw your pension. Also consider NI. I think fundamentally you are on the right lines that money put into a pension usually attracts some tax advantages, but I don't know what the rules are above and below the 100k threshold.

devends

Hi there, thanks for all the comments, much appreciated.

And yes you are clearly correct, I had planned to get the advice of a financial adviser, I just wanted to make sure I understood things a bit more before I wasted their time and mine!

Thank you.

kimwp

I couldn't post the links, but Google

"tax on over 100k salary"
"Adjusted net salary"

And read a few of the articles. When I did this for pipping over the 50k threshold recently, I found that it was helpful to read different sources as no article by itself explained all the points.

pred02

Hi,

I am going to get an accountant but one thing is bit time sensitive. I received a bit of a bonus last year so my income is probably in the £112k range for last year. 

I put 8% in my employee pension and then my employer matches 12%. I also the last 4 years started to put £4000k in a LISA account with government top up of £1000.

Each year when I do a self-assessment I need to pay £600-800.

Would it be more tax efficient to put money into a LISA or a SIPP to minimise the 60% tax impact? Reading online it is not clear if the employee pension can be deducted at the end of the year?

Thanks