60% effective tax band-advice needed

sturgeon

My basic salary is £110k which takes me into this effective 60% tax rate for the £10k over £100k. As a result, my own pension contributions (taken at source) add up to (just about) £10k so my effective taxed salary is £100k. So I'm not really impacted by the 60% effective rate, right?

If I receive say a £10k bonus, or my salary increases by £5k next year, then I'll need to make further adjustments. My understanding is that I could ask my employer (no idea if they can accommodate it) if a £10k bonus can go as salary sacrifice into my pension, instead of being paid to me. What does this effectively mean though, how much of that £10k is 'kept' and actually goes towards my pension? And I assume the alternative is that £10k is taxed at c. 60% and hence I only receive £4k of it if I don't do anything about it and get it paid within my pay packet when the bonus is due?

The other question is, at what point do I stop these measures? My understanding is this tax trap 'stops' when earnings are above £125k but what does that actually mean? If my income (salary and bonus) was say £130k, am I no longer impacted by this 60% tax trap? Or am I somewhat impacted until my earnings reach a new minimum level? I don't understand...obviously every earner over £125k isn't just putting every penny possible into pensions/salary sacrifices to get back down as close to £100k as possible?

Any chance this will be looked at in the new budget? Seems very strange and unfair to be charged 60% tax at this level. 

If I just want to accept it is what it is, and I don't want to put the amount into my pension to (hopefully) see the benefit in 30 years, I should continue to just have the amount above £100k included in my paid salary and just accept that I'm paying 60% tax on it but at least realise some additional cash income now and not in my pension when I retire?

Are there any other means to reduce this burden without it all having to go to a pension? Can I ask my employer to explore car hire purchase schemes, would I effectively be getting a 60% discount on any amount I sacrifice from my salary to pay for that? At least I'll benefit from that now and not at retirement.

Dazed_and_C0nfused

so my effective taxed salary is £100k. So I'm not really impacted by the 60% effective rate, right

Not really no. Your actual (taxable) salary would be £100k. But the Personal Allowance is based on adjusted net income not taxable income so you could have say £500 in taxable interest and £500 in taxable dividends, both of which will be taxed at 0% but mean ANI is £101,000 so you would still lose £500 of your Personal Allowance. Basically you need to understand adjusted net income to know whether you are impacted or not.

If I receive say a £10k bonus, or my salary increases by £5k next year, then I'll need to make further adjustments. My understanding is that I could ask my employer (no idea if they can accommodate it) if a £10k bonus can go as salary sacrifice into my pension, instead of being paid to me. What does this effectively mean though, how much of that £10k is 'kept' and actually goes towards my pension? And I assume the alternative is that £10k is taxed at c. 60% and hence I only receive £4k of it if I don't do anything about it and get it paid within my pay packet when the bonus is due?

All £10k would go into your pension. But that would be an employer contribution so you wouldn't get any pension tax relief added to it. But you would avoid paying tax and NI on the £10k you have sacrificed.

If you didn't sacrifice it you would only pay 40% tax (and 2% NI) on it at the point it's paid.  But that could well mean there is extra tax to pay later hence the effective 60% tax rate.

Any chance this will be looked at in the new budget? Seems very strange and unfair to be charged 60% tax at this level. 

You need to email Jeremy Hunt about that but I suspect he won't reply before the 17th.

Are there any other means to reduce this burden without it all having to go to a pension?

Yes.  Purchasing extra holiday or going part time are two common ones.  And Gift Aid payments reduce your adjusted net income.

[Deleted User]

On what happens after £125000 (actually £126140) the tax rate is 40% until £150000 after which it becomes 45%. Rumours today (and only rumours) that there may be changes afoot here.

Albermarle

Any chance this will be looked at in the new budget? Seems very strange and unfair to be charged 60% tax at this level.

It is probably a bit pointless doing too many calculations about your current position, as there might be things announced that will change your position.

It is unlikely that anything announced will be of benefit to anyone in your salary bracket, probably the opposite. Although I suppose it is possible something could be done about this 60% anomaly.

Albermarle

Just seen this post on a thread on the Savings and Investments forum.

According to the Telegraph today they are planning on lowering the 45% rate to £125,000, which I think means there will be a very small slice of income that has an effective 67% rate as it will cross into the band where the personal allowance tapers away….

https://www.telegraph.co.uk/politics/2022/11/12/sunak-hunt-mull-income-tax-grab-thousands-britons/ (Paywall)

[Deleted User]

Albermarle said:

Just seen this post on a thread on the Savings and Investments forum.

According to the Telegraph today they are planning on lowering the 45% rate to £125,000, which I think means there will be a very small slice of income that has an effective 67% rate as it will cross into the band where the personal allowance tapers away….

https://www.telegraph.co.uk/politics/2022/11/12/sunak-hunt-mull-income-tax-grab-thousands-britons/ (Paywall)

That’s the rumour that I was talking about. However it still means that income between 100k and 125k is effectively taxed at 60% plus NI of 2% (not 67% ?). 

DoctorStrange

65%+2% would be the rate between £125,000 and £126,140, before dropping back to 45%+2%

[Deleted User]

DoctorStrange said:

65%+2% would be the rate between £125,000 and £126,140, before dropping back to 45%+2%

Nearly - £125140. 100000 + (12570 x 2)

[Deleted User]

So - according to the latest leaks - £140 of income will have an effective tax rate of 67% - the part between £125000 and £125140. Makes sense.

Jeremy535897

Too much speculation without any basis.

[Deleted User]

Jeremy535897 said:

Too much speculation without any basis.

Not according to Mr Peston earlier. Benefits and state pension to rise by 10.1%, National living wage to £10.40, 45% to start at £125000. Of course, he could be wrong!