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Avoiding 60% marginal tax rate
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Pat38493
Posts: 3,334 Forumite


in Cutting tax
Hi,
If I am earning above 100K, and I have already put the maximum pension allowance 40K into my pension, can I avoid the 60% rate but paying more into the pension, or will my personal allowance still be withdrawn?
In other words if I paid say 60K into the pension, would the additional taxable 20K of pension contributions only be subject to 40% tax or the full 60% by withdrawing personal allowance?
If I am earning above 100K, and I have already put the maximum pension allowance 40K into my pension, can I avoid the 60% rate but paying more into the pension, or will my personal allowance still be withdrawn?
In other words if I paid say 60K into the pension, would the additional taxable 20K of pension contributions only be subject to 40% tax or the full 60% by withdrawing personal allowance?
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Comments
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Do you have any carry-forward allowance for pension contributions?
You can also reduce the tax liability by making Gift Aid donations.1 -
Grumpy_chap said:Do you have any carry-forward allowance for pension contributions?
You can also reduce the tax liability by making Gift Aid donations.0 -
This is a terrible idea, because if you exceed your allowance, you get no tax relief on the extra contribution (so you remain in the 60% "band"), and you pay tax on the excess as well (although it may be possible to have that paid out of the pension pot). See:
https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/the-annual-allowance
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I am in a similar position. After fully using pension allowances, If your company offers salary sacrifice on (electric/hybrid) lease cars, it’s worth checking it out, it will give you a 63% saving on the lease costs.
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Jeremy535897 said:This is a terrible idea, because if you exceed your allowance, you get no tax relief on the extra contribution (so you remain in the 60% "band"), and you pay tax on the excess as well (although it may be possible to have that paid out of the pension pot). See:
https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/the-annual-allowance0 -
Jeremy535897 said:This is a terrible idea, because if you exceed your allowance, you get no tax relief on the extra contribution (so you remain in the 60% "band"), and you pay tax on the excess as well (although it may be possible to have that paid out of the pension pot).
1. How income tax relief is provided for pension contributions.
2. How the annual allowance charge works in a different way to how normal income is taxed.
3. How the personal allowance taper is not impacted by an annual allowance charge.
As you say, scheme pay can mitigate things further (as can the contribution being made by the employer through salary sacrifice because of the employee NIC savings).
The proximity of the individual to the lifetime allowance and their expected tax rates on retirement can also make quite a difference. For example, it is very unlikely to be appropriate if the individual is well above the LTA already.
What OP really needs is a spouse with a little (but commercial) business that really needs a new van. OP becomes a partner in it, takes 99% of the profit share for the year, and use the amount of loss the AIA creates against the salary. Yes, it is more complicated than that, but it's a lot more tax efficient.2 -
[Deleted User] said:Jeremy535897 said:This is a terrible idea, because if you exceed your allowance, you get no tax relief on the extra contribution (so you remain in the 60% "band"), and you pay tax on the excess as well (although it may be possible to have that paid out of the pension pot).
1. How income tax relief is provided for pension contributions.
2. How the annual allowance charge works in a different way to how normal income is taxed.
3. How the personal allowance taper is not impacted by an annual allowance charge.
As you say, scheme pay can mitigate things further (as can the contribution being made by the employer through salary sacrifice because of the employee NIC savings).
The proximity of the individual to the lifetime allowance and their expected tax rates on retirement can also make quite a difference. For example, it is very unlikely to be appropriate if the individual is well above the LTA already.
I am not in this situation yet but I expect to be in it in about 3 years from now.
Also I am aware of the LTA risks as well - I am not yet close to the LTA.0 -
Pat38493 said:
OK wait - so actually my original theory was correct - if I over contribute to the pension, income which would have been effectively taxed at 60% may in fact only end up being taxed at 40% (and potentially up to a year later)?...
Also I am aware of the LTA risks as well - I am not yet close to the LTA.
If in basic rate on withdrawal, and assuming you are below the lifetime allowance, you get £15 tax free and 80% of £45, for a return on your £100 of £51. This is better than the £40 from the effective £60 band. So far so moderately good, although an effective tax rate of 49% is hardly cause for celebration. If in higher rate tax, you get £15 tax free and 60% of £45, for a return of £42. That £2 difference is paltry compensation for giving up use of this money until age 55/57.
Over the lifetime allowance, numbers become horrible. The effect here is that you simply lose the 25% tax free, and the government takes that instead in LTA penalty. So, £36 back from £100 if in basic rate tax on withdrawal, and £27 back from £100 if in higher rate tax. Both worse than taking the money now at effectively 60% tax.
I'll leave you to work out these scenarios if you do not (or perhaps cannot) use 'scheme pays'. The results in this case are universally poor, and I'd suggest that you should avoid them.
Have you considered cutting down your work hours instead?
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EdSwippet said:Pat38493 said:
OK wait - so actually my original theory was correct - if I over contribute to the pension, income which would have been effectively taxed at 60% may in fact only end up being taxed at 40% (and potentially up to a year later)?...
Also I am aware of the LTA risks as well - I am not yet close to the LTA.
If in basic rate on withdrawal, and assuming you are below the lifetime allowance, you get £15 tax free and 80% of £45, for a return on your £100 of £51. This is better than the £40 from the effective £60 band. So far so moderately good, although an effective tax rate of 49% is hardly cause for celebration. If in higher rate tax, you get £15 tax free and 60% of £45, for a return of £42. That £2 difference is paltry compensation for giving up use of this money until age 55/57.
Over the lifetime allowance, numbers become horrible. The effect here is that you simply lose the 25% tax free, and the government takes that instead in LTA penalty. So, £36 back from £100 if in basic rate tax on withdrawal, and £27 back from £100 if in higher rate tax. Both worse than taking the money now at effectively 60% tax.
I'll leave you to work out these scenarios if you do not (or perhaps cannot) use 'scheme pays'. The results in this case are universally poor, and I'd suggest that you should avoid them.
Have you considered cutting down your work hours instead?
Cutting working hours instead is also an option I guess, although in the type of job I am in, this might be easier in theory than in practice as I doubt anyone else would do my work in the meantime and it still needs to be done, but definitely worth considering.
I guess donating money to charity is also an option which depending on your point of view might be preferable to having it taxed at 60%.
I have to admit I'm not too clear on why "scheme pays" or not makes any difference - wouldn't I end up paying the same amount of tax either way, either through my tax return or through the scheme - I'm obviously missing something there.0 -
Pat38493 said:I have to admit I'm not too clear on why "scheme pays" or not makes any difference - wouldn't I end up paying the same amount of tax either way, either through my tax return or through the scheme - I'm obviously missing something there.
Suppose you don't use it. You put £100 into your pension and pay £40 in tax from other (post-tax!) money. On withdrawal, basic rate tax and below the LTA, you receive £25 tax free and 80% of £75, giving you £85. However, you now need to subtract the £40 you paid directly in AA tax from this, leaves you £45. That is less than the £51 you obtain from using 'scheme pays'. For higher rate tax, the result is £30, compared to £42 with 'scheme pays'.
Now add in LTA complications. Over both the AA and LTA, no scheme pays, and higher rate tax on withdrawal. Contribute £100 and pay £40 in tax. Withdrawal of this £100 is taxed at 55%, returning £45. Subtract the £40 paid in tax to make that contribution leaves you £5 out of the £100 you began with. An effective 95% tax rate.
From the above, you can now see how to construct a 100% tax case. (Hint: there is a tax bracket above 40%.)1
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