Avoiding/Mitigating 40% tax?

penners324

What's wrong with paying 42% tax as opposed to 32.5% tax on a couple of thousand pounds?

eskbanker

penners324 said:

What's wrong with paying 42% tax as opposed to 32.5% tax on a couple of thousand pounds?

It's hardly unusual or unreasonable for people, especially those on a money-saving site, to seek to minimise their tax liabilities or to improve their overall net position (not always the same thing).

Albermarle

Marcon said:

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.

My thoughts exactly.

Workerdrone

penners324 said:

What's wrong with paying 42% tax as opposed to 32.5% tax on a couple of thousand pounds?

Physiologically its a bit of a damper to do a 12 hour night shift without enough staff, dealing with deaths etc and to know that nearly 5 hours of it is going to the tax man. HR tax is just one of those inconvieniences directors and higher paid office workers expect to deal with. Nothing wrong with trying to reduce the tax liability when nurses are getting hit with fiscal drag.

Workerdrone

Albermarle said:

Marcon said:

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.

My thoughts exactly.

I'll revisit it next week. I just tend to be a thinker.

NameWithheld

penners324 said:

What's wrong with paying 42% tax as opposed to 32.5% tax on a couple of thousand pounds?

For me, creeping into higher rate tax would stop me taking advantage of the partial transfer of my wife's personal allowance, and also half my savings tax allowance. So I salary sacrifice quite a lot of my pay to a pension to avoid it, and make up my take home pay by using savings. It helps that I will retire in a couple of years, so I will start taking the pension fairly soon.

Albermarle

Let's not forget there will be spending cuts as well.
When you are parked up in an ambulance outside A&E for 4 hours, you will probably not be worrying about extra taxes too much.

Nurse2047

Thanks  for this, I’m a band 7 nurse and thought of this scenario also. If I’m working under this pressure and stress I want to keep as much money as possible. 

Nurse2047

Would paying into the nhs avc once you reach that higher tax bracket help? 

AliceBanned

I am about to go just over that threshold as I recently got promoted, (after 3 years trying) and also had already done some overtime. The promotion takes me just over into the current 40% threshold. I also want to avoid paying higher rate tax and am thinking of an AVC as I need to add to my pension anyway. I'm in the Local Gov Pension scheme and it has an AVC with Prudential. For me I am only just looking into it and also not particularly financially literate Marcon - but there is nothing wrong with wanting to avoid the higher rate after all the hard work. The higher rate tax has hit more people as it has been frozen for some time I believe, and with inflation it is going to mean 1/10 people are liable to pay it. It's good to look into the options and I'm trying to understand whether a SIPP or AVC is best for me. 

Similarly I feel if I pay the higher rate my overtime would be almost cancelled out, and I did the overtime because I need the money at the moment. 

Also with the increment there is back pay, presumably the same for your wife. How does this work in terms of tax anyone - presume it adjusts later in the year as there will be one salary payment that is including back pay?