60% effective tax band-advice needed

Exodi

[Deleted User] said:

On-the-coast said:

is the personal allowance still withdrawn from 100k? so we still have the 60% marginal rate from 100k through to 125k..... what a missed opportunity to fix that if i've understood correctly (not had much time to read all the details)

No change at all there. In fact, it is absolutely ringfenced by confirming that the 45% rate band will commence at 125140 - exactly where the personal allowance taper runs out. 

Indeed - it's certainly easier to understand (especially combined with the changes to NI thresholds) but it does now cement that someone will be left with less from £1 earned at the higher rate, than £1 earned at the additional rate, which is pretty strange from a logical standpoint.

On-the-coast

Thanks both.
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.

Exodi

On-the-coast said:

Thanks both.
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.

Completely agree.

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...

Dazed_and_C0nfused

Grumpy_chap said:

Maybe the 45% won't start until £125,141?

Are you Jeremy in disguise 😳

Jeremy535897

Dazed_and_C0nfused said:

Grumpy_chap said:

Maybe the 45% won't start until £125,141?

Are you Jeremy in disguise 😳

Absolutely not!

Grumpy_chap

Exodi said:

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.

There could well be a gap of £40k where no-one earns.

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.

Albermarle

[Deleted User] said:

Jeremy535897 said:

The 45% rate starts at £125,140 from 6 April 2023, which deals with the trivial issue raised earlier about income between £125,000 and £125,140. With inflation around 25% over a 2 year period, the reality of this measure is that it will bite at incomes equivalent to £100,000 just a year ago.

Given the dedication with which people work (or in some cases reduce work) to avoid these higher rates, my prediction that all this measure will do is reduce productivity further and yield very little, if anything, extra.

Couldn’t agree more. Slightly surprised that pension relief was not restricted in some way. Perhaps a step to far!

The consensus from other threads speculating on this before today, was that changing pension legislation, tax relief, salary sacrifice etc was too complicated, and with too many possible unintended consequences, to propose given the relatively short time frame involved. It would need a proper detailed review, which might still happen at some time.

JamTomorrow

Grumpy_chap said:

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.

I am in year 1 of a YoYo year paying minimal in my pension in 22/23 with a plan to pay almost £80k in 23/24 to fully eliminate the 60% rate.  Suspect this will be more common in the future.

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)

Grumpy_chap

JamTomorrow said:

Grumpy_chap said:

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.

I am in year 1 of a YoYo year paying minimal in my pension in 22/23 with a plan to pay almost £80k in 23/24 to fully eliminate the 60% rate.  Suspect this will be more common in the future.

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)

Thanks.  So, if I understand your detail correctly, salary £180k.
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.

Bonkers.
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.  

TheAble

Interesting strategy with the yo-yo. On the downside you'd miss out on a year's growth on the tax you would otherwise have saved on the £40k, plus you may lose your job after any of the years 1,3,5 etc. (You'd still get carry forward but the future more uncertain).

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.