Avoiding the 60% tax trap... 1 February at 3:16PM in Cutting tax 8 replies 442 views

Astraeus

I'd be grateful for a bit of help please.

An exceptional bonus means that, for 2022/23, my income will nudge above £100k, only to return to below that level for 2023/24.

I get relief at source on my pension contributions of £8.5k and, grossing those contributions up to £10.2k, my adjusted net income is at £102.5k. I also claim additional tax relief on my pension contributions, for which HMRC have amended my tax code to 1628L.

Unfortunately, I haven't kept track of my gift aid donations this year.

Can I just check my understanding please:

1. My personal allowance isn't offset against my adjusted net income, is it? So the £2.5k by which I'm over £100k will reduce my PA by £1.25k?

2. If I were to make additional contributions of £2k to my pension pot in this tax year, which grossed up would be £2.5k, my adjusted net income would be £100k exactly and I wouldn't lose any of my PA?

3. As my income for 22/23 exceeds £100k, am I required to complete a self-assessment tax return by October irrespective of whether my adjusted net income is less than £100k?

I will likely speak to an accountant after the year end but I just had these few queries to try to help me get my head around the situation. Thanks in advance for any help.

Dazed_and_C0nfused

Net RAS contributions of £8.5k would be grossed up to £10,625.  You need to add 25% to the net contribution not 20%.

1.  Yes, you lose £1 of Personal Allowance for each £2 your ANI exceeds £100k

2.  If your adjusted net income is £100,000 (or £100,001) then you would get the full Personal Allowance

3.  Yes.  If your taxable income is £100,000 or more then HMRC will want a Self Assessment return.

Astraeus

Thank you @Dazed_and_C0nfused.

I believe I'm right in including a cash allowance (in lieu of parking) in my calculation of taxable income too, aren't I? Just working out the exact amount I'd need to pay into my pension in February and March in order to reduce my ANI to £100k exactly.

Dazed_and_C0nfused

I can't imagine a cash allowance not being taxable income but presumably you can verify this from your payslips?

Astraeus

I can, will just take a bit of calculating.

Last one, I promise - does salary I've sacrificed come off my taxable income? Cyclescheme etc.

Dazed_and_C0nfused

Astraeus said:

I can, will just take a bit of calculating.

Last one, I promise - does salary I've sacrificed come off my taxable income? Cyclescheme etc.

Not aufait with cycle scheme but salary sacrifice pension contributions definitely don't get deducted off your taxable pay.

Your taxable pay already accounts for the amount sacrificed so if you deducted it again you would be double counting it!

Astraeus

I thought as much - if it sounds too good to be true, especially when it comes to tax...

@Dazed_and_C0nfused, you've been a real help. Thanks so much and have a great day!

Dazed_and_C0nfused

Astraeus said:

I thought as much - if it sounds too good to be true, especially when it comes to tax...

@Dazed_and_C0nfused, you've been a real help. Thanks so much and have a great day!

Salary sacrifice is very generous.

Say you earn £60,000 and sacrifice £10,000 into your pension.

Downside is it's an employer contribution so you don't get the £2,500 in RAS tax relief a personal contribution could make.

But you have avoided paying a mix of 20% and (mainly) 40% on the amount sacrificed and also some NI.  Mainly 2% but a bit at 12%.

And you don't have to contact HMRC like you would go claim higher rate relief on a RAS contribution.  

Very tax efficient for most people.

Astraeus

I just raised the idea of salary sacrifice with my employer, expecting to be shot down because we employ over 2,500 people. Alas, no, it's under consideration and might be the way our workplace pension goes this year - hurrah!