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60% effective tax band-advice needed
in Cutting tax
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I hate it when reductions (whether benefits for the low paid or tax allowances for the high) are structured in a way that causes marginal impact to jump. It makes people (rationally) do things to compensate in a way that "gently" rising taxes on a consistent basis does not.
It would seem so obvious that such things should be avoided either by fixing or never introducing in the first place.
While employees are able to salary sacrifice, the government will see an incredible amount of people earning exactly £100k, with very few earning between £100k - £125k, and then a significant increase above £125k.
The OP is a perfect example of someone who is likely to consider this. Can't say I'd be too happy receiving £3,800 from a £10,000 bonus...
An individual earns £100k, so OK.
The individual receives a £5k pay rise so makes pension contributions for the £5k.
As pay increases, the individual makes more pension contributions rather than land in the 62% tax & NI band.
The individual will logically keep doing so until they have maxed out the £40k annual allowance (plus any carry-forward).
At that point, all sorts of adjustments might be required, either carry on paying pension the £40k and suffer tax at 62% on more than the £140k, or work less hours (buy holiday) or operate a yo-yo to take the hit one year, but then make pension contributions and use carry-forward to avoid the hit for the next years, etc.
I can see that Accountants could have a lot of fun working out optimum strategies. It could even mean planning ahead once earnings are crossing £90k to reduce pension contributions to keep back carry-forward for when the £100k is crossed.
Also if you make you £80k in as few salary sacrifice monthly payments as possible you can also make a NI benefit by avoiding the 2% higher rate. My calcs at the time indicated I could get £80k in my pension at a cost approximately £4k less from this combination of YoYo and as few monthly payments as possible (compared to a straight line 12 month phasing)
This year zero pension contributions so suffering the 62% on the £25k above £100k (tax / NI = £15.5k) plus 47% on the amount above £125k to £180k (tax / NI = £25.85k). Total tax on £80k above £100k = £41.35k this year.
Next year, SS £80k so salary is £100k and nothing taxed at 62% or 47%.
Result £80k in pension plus £38.65k in your pocket. Over 2 years.
Alternative would be £180k less £40k into pension, so salary £40k above the £100k.
£25k taxed at 62% (£15.5k tax).
£15k taxed at 47% (£7.05k tax).
Total tax this year and next year £22.55k x 2 = £45.1k
Result £80k in pension plus £34.9k in your pocket. Over 2 years.
£3.75k better over two years by yo-yo approach.
Perhaps the Government don't realise that people will do this type of thing...
Obviously, the example figures I have used assume this new tax banding is already in force which it won't be until next tax year.
May overall still be worth it for the £3.75k but possibly marginal.
Edit: Thinking about it a bit more, it becomes a lot more relevant the less you are over £140k. Say if earning £150k it makes sense to do it as a 30 and a 50 rather than 2x40.
There is a utility to having money invested sooner for all that it may not be tax-optimal.