Avoiding/Mitigating 40% tax?

Workerdrone

My wife is a band 7 nurse. With enhancements and overtime last year she earned £45980. Her next increment will take her to £47480. This excludes the figure the NHS put into her pension for her.

Please forgive a few assumptions here.

Assumption 1.) If the RCN do manage to squeeze a larger pay rise out of the government it risks putting her into the 40% tax bracket.*
Assumption 2.) The chancellor may do some fiddling with higher rate relief.
Assumption 3.) Income tax rates and personal allowances are likely to be fixed for the foreseeable.

Hence its not beyond the realms of possibility that she may spill over into the 40% tax band when her earnings exceed £50,270 

She can't salary sacrifice as the NHS pension is a CARE scheme so that would bring down her average earnings.

I've set her up a small SIPP she can draw on at 60 to bridge the gap to 67/68 when her 2015 section becomes payable. Lets assume the chancellor cuts higher rate relief

So my question is really quite simple. Say she earns £50,370 in a year. That last £100 is taxed at 40% so she loses £40 and keeps £60

But if she puts £80 into the SIPP, and receives basic rate tax relief of another £20 in reality her earnings over £50270 are only taxed at 20%

I hope that makes sense. Maths never was my strong suite. Hope someone is kind enough to correct any errors in my thinking or tell me if I'm way off base.

* She voted against striking, isn't a militant person, nursing has always been her vocation and she wouldn't be asked to  strike anyway as she's a paediatric intensive care nurse. She's gone from being a top band 5 to a band 7 in the last 6 years chiefly because I encouraged her to go for the interviews even if just for experience, so she's not been a long term high earner. She works bl**dy hard for every penny of that. PICU really is the SAS of nursing so I'd rather make sure she doesn't end up paying 40% tax where possible.

NoMore

You're missing the fact that you could claim back the other 20% tax on that £100 and so pay no tax at all on it.

A simple phone call to HMRC would sort it out, most likely by a tax code change.

Workerdrone

NoMore said:

You're missing the fact that you could claim back the other 20% tax on that £100 and so pay no tax at all on it.

A simple phone call to HMRC would sort it out, most likely by a tax code change.

I must be being very dim. In the above example, I am assuming the 40% higher rate relief on contributions has been scrapped. Afraid I could use more of a worked example? I also don't understand what the HMRC would do with a tax code change?

Flugelhorn

paying 40% is not such a disaster - it is just a different banding, you still have more money at the end of the day 

RobM99

40% tax isn't sucj a disaster as you'll not be paying 13.25% NI. Or am I wrong?

Dazed_and_C0nfused

RobM99 said:

40% tax isn't sucj a disaster as you'll not be paying 13.25% NI. Or am I wrong?

No one is paying 13.25% anymore, that is history.

Dazed_and_C0nfused

Workerdrone said:

My wife is a band 7 nurse. With enhancements and overtime last year she earned £45980. Her next increment will take her to £47480. This excludes the figure the NHS put into her pension for her.

Please forgive a few assumptions here.

Assumption 1.) If the RCN do manage to squeeze a larger pay rise out of the government it risks putting her into the 40% tax bracket.*
Assumption 2.) The chancellor may do some fiddling with higher rate relief.
Assumption 3.) Income tax rates and personal allowances are likely to be fixed for the foreseeable.

Hence its not beyond the realms of possibility that she may spill over into the 40% tax band when her earnings exceed £50,270 

She can't salary sacrifice as the NHS pension is a CARE scheme so that would bring down her average earnings.

I've set her up a small SIPP she can draw on at 60 to bridge the gap to 67/68 when her 2015 section becomes payable. Lets assume the chancellor cuts higher rate relief

So my question is really quite simple. Say she earns £50,370 in a year. That last £100 is taxed at 40% so she loses £40 and keeps £60

But if she puts £80 into the SIPP, and receives basic rate tax relief of another £20 in reality her earnings over £50270 are only taxed at 20%

I hope that makes sense. Maths never was my strong suite. Hope someone is kind enough to correct any errors in my thinking or tell me if I'm way off base.

* She voted against striking, isn't a militant person, nursing has always been her vocation and she wouldn't be asked to  strike anyway as she's a paediatric intensive care nurse. She's gone from being a top band 5 to a band 7 in the last 6 years chiefly because I encouraged her to go for the interviews even if just for experience, so she's not been a long term high earner. She works bl**dy hard for every penny of that. PICU really is the SAS of nursing so I'd rather make sure she doesn't end up paying 40% tax where possible.

You have missed quite an important factor.

An NHS salary of £47,480 will equate to taxable pay of £42,732, £7.5k shy of being a higher rate payer. 

Hopefully the RCN action will result in a better pay deal but I can't see higher rate tax being something she needs to be overly concerned about.

Unless she's Scottish resident for tax purposes in which case she's close, subject to what the Scottish government decide for the forthcoming tax year.

And I suspect you already realise this but the NHS aren't putting any money into a pension for her.  As a CARE scheme member she will get a pension based on the scheme rules, the contributions are irrelevant.

MX5huggy

Did you have children and get child benefit, because that starts getting taken away as soon as one of you gets £50000 or more, increasing Pension payments avoids this.

Yes NI is reduced to (2% or 3.25% depending on what the chancellor said last). From 12% or 13.25%. On earning over £50270.

NHS pension contributions rise from 9.3% to 12.5% once earnings exceed £47846. This does not work like tax bands, that 1p that takes you to £47846 means you pay 3.2% extra on the whole lot. This on its own will ease you away from paying 50% tax. https://www.nhsbsa.nhs.uk/member-hub/cost-being-scheme

As you note the 2015 scheme retirement age is 67 (actually it’s the members state pension age so this can move if your wife is young ish). But it is payable from 55 with reductions (hefty at 55). The reductions are cost neutral that is to say they are just a reflection of getting the pension for more years. Me and the wife plan on taking NHS and LGPS pensions as early as we can afford (without taking any optional lump sums, these are poor value) using SIPP’s and other savings to top up till State pension is payable. 

Dazed_and_C0nfused

NHS pension contributions rise from 9.3% to 12.5% once earnings exceed £47846. This does not work like tax bands, that 1p that takes you to £47846 means you pay 3.2% extra on the whole lot. This on its own will ease you away from paying 50% tax. https://www.nhsbsa.nhs.uk/member-hub/cost-being-scheme

@MX5huggy

They're the old rates up to October 🙂

NoMore

Workerdrone said:

NoMore said:

You're missing the fact that you could claim back the other 20% tax on that £100 and so pay no tax at all on it.

A simple phone call to HMRC would sort it out, most likely by a tax code change.

I must be being very dim. In the above example, I am assuming the 40% higher rate relief on contributions has been scrapped. Afraid I could use more of a worked example? I also don't understand what the HMRC would do with a tax code change?

Oh sorry missed that, I assumed you meant as of now, not some worry about something that hasn't happened yet and may not happen.

Marcon

Workerdrone said:

My wife is a band 7 nurse. With enhancements and overtime last year she earned £45980. Her next increment will take her to £47480. This excludes the figure the NHS put into her pension for her.

Please forgive a few assumptions here.

Assumption 1.) If the RCN do manage to squeeze a larger pay rise out of the government it risks putting her into the 40% tax bracket.*
Assumption 2.) The chancellor may do some fiddling with higher rate relief.
Assumption 3.) Income tax rates and personal allowances are likely to be fixed for the foreseeable.

Hence its not beyond the realms of possibility that she may spill over into the 40% tax band when her earnings exceed £50,270 

She can't salary sacrifice as the NHS pension is a CARE scheme so that would bring down her average earnings.

I've set her up a small SIPP she can draw on at 60 to bridge the gap to 67/68 when her 2015 section becomes payable. Lets assume the chancellor cuts higher rate relief

So my question is really quite simple. Say she earns £50,370 in a year. That last £100 is taxed at 40% so she loses £40 and keeps £60

But if she puts £80 into the SIPP, and receives basic rate tax relief of another £20 in reality her earnings over £50270 are only taxed at 20%

I hope that makes sense. Maths never was my strong suite. Hope someone is kind enough to correct any errors in my thinking or tell me if I'm way off base.

* She voted against striking, isn't a militant person, nursing has always been her vocation and she wouldn't be asked to  strike anyway as she's a paediatric intensive care nurse. She's gone from being a top band 5 to a band 7 in the last 6 years chiefly because I encouraged her to go for the interviews even if just for experience, so she's not been a long term high earner. She works bl**dy hard for every penny of that. PICU really is the SAS of nursing so I'd rather make sure she doesn't end up paying 40% tax where possible.

Three cheers (and more) for people like your wife.

Mightn't it make sense to wait until after next week's autumn statement and then ask the question based on what has actually been announced? It's no bad idea to make decisions based on facts rather than assumptions, especially if you aren't great with numbers.