Psychology of accepting higher rate tax

YellowStarling

theoretica said:

It is an interesting one - because no one likes paying tax, but actually I value (some) of the things tax pays for very much and consider them worth paying towards.

Will you be a higher tax payer in retirement?  Have inheritance tax due on your estate?  How much are you avoiding tax and how much just postponing it?

Agreed - and I pointed out that this wasn't strictly a tax-bashing post; I too value the contributions I and we all can make, and so am not against paying more tax; I just naturally get pulled to the strategy and optimisation of it!

Your other points are very valid and they - along with similar points raised by other posters below - are ones that, if I'm honest, I probably haven't stopped to consider enough.  Thank you.

YellowStarling

Grumpy_chap said:

Lot's of personal considerations in assessing the OP's question and it is only those personal considerations that make a decision possible.

I would certainly weigh up whether the higher rate tax is avoided now only to be suffered at retirement.

Also consider the extent to which the current income is permanent or influenced by temporary factors.  There could be many but one would be HICBIC.  It may make sense to make higher pension contributions for the final couple of years of child benefit entitlement and then drop pension contribution down - but that is a purely tax assessment and is still not taking into account whether the household really needs that income now.

Again, really useful point about my current situation, i.e. that I am fortunate enough to be earning what I'm earning with the current committed outlays that I have, and both of these contributing to the ability to lock away as much I have been (and therefore optimise tax positions).

If either of those were to change for the better (more family) or worse (loss or change to income), would I value slightly more in the accessible coffers now... As well as the manipulation of income for other assessment purposes.  Again, thank you.

pjcox2005

theoretica said:

It is an interesting one - because no one likes paying tax, but actually I value (some) of the things tax pays for very much and consider them worth paying towards.

Will you be a higher tax payer in retirement?  Have inheritance tax due on your estate?  How much are you avoiding tax and how much just postponing it?

I'm like paying tax. Higher tax is an indicator of greater wealth and salary, has an impact to society as a whole and basically states that I have security and options that 99% of the world's population don't have. It should be something to be proud of.

I do use pensions and Isas as they've been set up by Government to encourage savings and help in retirement but i don't go out of my way to actively lower my tax bill further other than standard stuff (e.g. donating through salary sacrifice to be more efficient). I've seen too many people chase the tax saving via tax planning/avoidance or alternatively excess saving and come off worse as they miss sight of what makes them happy/content.

YellowStarling

Simes122 said:

How old are you?

I'm in Scotland, so get hit by the marginal 54.25% Tax NI rate between 43662 and 50k.   I see that as unfair differential taxation - I'm paid via a UK National pay spine, but get clobbered by more tax than my colleagues on the same pay point on the pay spine who aren't in Scotland.    Thus I sal sac to the max to avoid paying too much tax and as I'm retiring soon, it all fits my strategy.    However, I'm now in the last year, and I can no longer sal sac to the max for the whole year or I exceed Annual Allowance.   Thus I wrestle with the same thing - it pains me to only get 45.75p of every £1 I earn once I've filled my Annual Allowance.   

I'm well off for sure, but it still grates when I see how much of my gross salary I need to take to make less than half the difference in my pay packet.  It is what it is in a sense, and if I needed more net income now, I'd take it.   But I'm of a mindset this close to my retirement, I'd rather enjoy it then, than now and be comfortable then.    There are precious few options short of working again once retired, to improve your income.   And tax is useful, but noone really wants to pay more than they have to, unless they were especially altruistic!   You can volunteer to pay more tax apparently - I bet there aren't many that do!!!

I've always worked on the basis that actually, I want to achieve the same level of expenditure in retirement as I do when I'm working (obviously tempered by some slight reduction in expenditure made up for increases elsewhere - more hols/travel eg).   I don't want to live well when I'm working but poorly when retired.   The opposite is true probably!   So you need to choose, based on your age, whether or not your current pension strategy is the right one, or are you happy to sacrifice income in your retirement years etc.  That should inform how much you should be saving now, and spending now, vs in future.

Good points made - I'm early 30s so not looking to retire anytime soon (unless that premium bond windfall comes in!), but I probably didn't emphasise as much as I could have done in my OP that, aside from the tax strategy, I do really value the fact I can lock away income with plenty of time to grow as, like you, I would like to at least maintain my quality of life in retirement.  And the thought of needing to work in my later years, rather than merely wanting to and being healthy enough to, is a huge factor in my approach to modelling for retirement.

Nevertheless, the points raised upthread about striking a balance between enjoying life now as well as in the future are ones I'm taking on board.  I pretty much guarantee I won't be about to 180 and drastically reduce my retirement planning, so I'm comfortable I can strike a balance - I just need to see that as valuable over paying the additional in tax.

Grumpy_chap

pjcox2005 said:

I'm like paying tax. Higher tax is an indicator of greater wealth and salary, has an impact to society as a whole and basically states that I have security and options that 99% of the world's population don't have. It should be something to be proud of.

That's an interesting line of thought, but I'd particularly like to understand the part about "options that 99% don't have".

Periodically, in this forum and elsewhere, comments are made that if you earn £x you are in the top 1% of income for the world.  But, just having that income position in the global order does not necessarily create all the extra options that are inferred.  The higher income is linked to higher costs of living in the UK.  

What would the similar % of global income be for a full-time work on UK NMW?  Probably also a very high position in that global order, but not creating a life of luxury or massive choices.

YellowStarling

Albermarle said:

OP - There is a limit on how large a pension pot can get, before tax penalties start to be incurred- The Lifetime Allowance.

It is a complicated subject and the rules may well change before you get there, especially as the penalties tend to have to be paid later in life, rather than in your 50's or 60's. However if it looks like your pot could easily exceed a Million Pounds, with the current level of contributions + some small growth, then it maybe wise to cut back pension contributions in favour of saving from taxed income for the shorter/medium term.
The caveat is that 40% tax relief may not be available for ever, so maybe better to maximise it now while you can.

A really good point - I was aware of the Lifetime Allowance and more cautious models do see me exceed that.  The optimisation of tax now would be dwarfed by tax under that (and has me thinking along the lines of previous posters' points re the fact that I could end up being a high rate tax payer in retirement anyway).

The point about making hay whilst the sun shines is a helpful one too - part of the reason I contribute so much now is because I'm actually excluding state pension contributions from my forecasting.  Might be drastic, but I really want to avoid plans where I am dependent on something outside of my own control some 30-40 years away.

kinger101

Personally, I don't see it as that big deal.  As others have pointed out, it's a 10% increase when you factor in NI.  But it makes sense to use pension for tax efficiency and avoid it if you can.  I wouldn't get to hung up about lifetime allowance unless you're likely to be in a position where you'll exceed it AND need to carry on working.  Though I suppose that could be more likely with fiscal drag.

Bear777

I know where you are coming from on this. I have the same concerns at times about how much I’m squirrelling away versus what I could be doing with this money now. 

I am currently personally contributing £1400 a month to keep myself below the higher rate tax band. But there are other avenues and I am constantly exploring them as It is very likely that the value of my pensions within the next 10 year will exceed the LTA. I also do the following to reduce my taxable income:

- Gift aid
- Childcare vouchers (on the old scheme so can put £243 a month aside proper to tax)
- Reduced BIK so for example have gone down the route on an electric car which has reduced the BIK value of my vehicle by £4.5k per annum. 

- Salary sacrifice: does your employee allow salary sacrifice towards the likes of a company car or anything else?

Some of those changes above (that are new which include the electric car and the salary sacrifice) mean that this year I am able to reduce my monthly pension contribution by £350 a month and maximise my take home pay. It may seem odd to do this, but I’ve reduced my tax liability in other ways that benefit me and make actual real savings and between my employer’s and my contribution I am still going to be putting in about £20k per annum into my pension. 

Long term I’ll probably step back in 10yrs and take on a role that pays a lot less and won’t worry about pension contributions etc..and ease my way into full retirement. 

However, it does surprise me there is not more noise around increasing the LTA. It is a poor relation compared to public sector equivalent levels and given inflation etc. surely there is cause to review over the next few years or maybe it’s a cash cow they need to keep afloat at the minute. 

Albermarle

YellowStarling said:

Albermarle said:

OP - There is a limit on how large a pension pot can get, before tax penalties start to be incurred- The Lifetime Allowance.

It is a complicated subject and the rules may well change before you get there, especially as the penalties tend to have to be paid later in life, rather than in your 50's or 60's. However if it looks like your pot could easily exceed a Million Pounds, with the current level of contributions + some small growth, then it maybe wise to cut back pension contributions in favour of saving from taxed income for the shorter/medium term.
The caveat is that 40% tax relief may not be available for ever, so maybe better to maximise it now while you can.

A really good point - I was aware of the Lifetime Allowance and more cautious models do see me exceed that.  The optimisation of tax now would be dwarfed by tax under that (and has me thinking along the lines of previous posters' points re the fact that I could end up being a high rate tax payer in retirement anyway).

The point about making hay whilst the sun shines is a helpful one too - part of the reason I contribute so much now is because I'm actually excluding state pension contributions from my forecasting.  Might be drastic, but I really want to avoid plans where I am dependent on something outside of my own control some 30-40 years away.

By the time you retire, it is highly likely that many things will change. There has been regular tinkering with pensions before. However you can only base your plans on what we know today, regarding the LTA and the State Pension.
Anything could happen to the former- be increased/decreased - could be abolished and replaced by something else etc
The latter is probably more predictable. Any government stopping or significantly reducing the state pension would be consigned to electoral oblivion, so it won't happen. Maybe the Triple Lock will be watered down, and the age you get it will keep increasing. Possibly it could be partly means tested, but any government bringing in that in would be 'very brave' 

HCIMbtw

I 100% share this mental struggle.. per my recent post a new job will take me beyond being able to sacrifice down to the basic rate..

And with the child benefit it makes that effective £50-60k transition a hard psychological pill to swallow

I also share concerns for what albermarle highlights.. e.g. complete reform, and it potentially screwing with sacrifice and diligence in contributing heavily to my pension at younger age

I really want more money in an ISA, for the flexibility of being able to withdraw it (in advance of rule changes) and to use it in the event I want to retire early, which I do.. but the higher rate acts as such a barrier to me accepting it and giving me the ability to take home more

I'm still early days, mid 30s, pension pot is less than six digits.. so think I'm gonna just try max out pension these next 3 years or so... Maximum tax efficiency, Should put me in a good position to then step back and enjoy taking more salary. My mortgage will be up for renewal then as well, so can probably re-evaluate quite a lot.