Ways to avoid 60% marginal tax rate having used £40k pension allowance

katieks

Hi everyone,

I know this is a wonderfully fortunate position to be in but I would appreciate advice.  I have earnt £133k in this tax year after allowable expenses.  I have a salary sacrifice pension which my employers have put £40k into using all my pension annual allowance for this tax year (I'm assuming this from last years figures as I haven't actually got the pension input amount for this year from them - they will only tell me in October).  I have maybe £1-2k max of carry forward so not enough.  I have already invested  £25k into a SEIS which will get me £12.5k off my tax bill.

But I wanted to check my understanding:
- Does the £12.5k simply come off my tax bill as a 'credit' rather than reduce the amount of income that is charged at marginal rate of 60%?  I think this is the case but not sure.
- Is the only way to avoid being charged 60% tax on the £33k (amount over 100k) to put £33k into a pension and pay an annual allowance tax charge on this (which I believe will be 40% instead of 60%)?

I know the tax tail shouldn't be wagging the dog, but I resent losing 60% of the income over £100k to the government when there might be a way to reduce it.  I have approx £60k in cash that I could use towards the tax mitigation.  I am in my late 30's and have no need to access the money.  I just want to avoid paying 60% tax.  The risks with SEIS look less daunting when I would have lost 60% to the taxman anyway, but a pension overpayment might be a better bet?  I'm a bit concerned about how hard it is to get your money out of the SEIS in the future.  Gift aid has been considered but it seems to me that you still end up out of pocket albeit your donation is massively grossed up for charity.

Very grateful for any advice.

Dazed_and_C0nfused

Pretty sure SEIS tax relief is a "tax reducer".

Your liability is calculated as normal and then the SEIS relief is a credit which reduces that. 

But nothing you have posted indicates you are in the 60% range.

Or are these comments not telling the whole story.  Salary sacrifice pension contributions are made as a result of you agreeing to a lower salary.  So isn't your taxable pay, the stating point for the tapered Personal Allowance, £133k less amount sacrificed?

I have earnt £133k in this tax year after allowable expenses

I have a salary sacrifice pension which my employers have put £40k into using all my pension annual allowance for this tax year

Also, with Gift Aid contributions, they aren't massively grossed up.  The charity only ever get 25% of what you donate.  If there are additional benefits arising from the gross contribution reducing your adjusted net income or increasing your basic rate band that simply benefits you.

It doesn't alter what the charity gets.

[Deleted User]

What is the total TAXABLE pay to date on the final March payslip?

katieks

£134 808.00

katieks

@Dazed_and_C0nfusedMy pension is non-contributory so I've stated salary sacrifice to keep it simple.  My taxable income is circa £135k but there are approx £2k of allowable expenses to take off (professional fees mainly).

rumpetroll

I don't have anything to suggest for you to help for this tax year but going forward you could potentially get a car on a salary sacrifice scheme, this is something I've looked at and an EV with the low BIK and being in the £100k+ salary range it makes it a cheap way to have a new car.

Also to note, you aren't paying 60% on everything over £100k, only up to £125k, after that it's back to normal higher rate tax. But if you are maxing out your pension and anything else that you can salary sacrifice that is actually worth it to you then at some point you just have to accept you will be paying a big chunk of tax.

[Deleted User]

katieks said:

£134 808.00

So - you are through and beyond the 60% ‘trap’ and into the 40% band on income above 125140 (45% from Thursday). 

So, even a £6000 net contribution (gross £7500) into a SIPP (taking into account your 2000 expenses) would only attract relief at 40%. 

Dazed is correct on the SEIS - it is a tax reducer.

Jeremy535897

See this earlier thread (but childcare was involved there):
https://forums.moneysavingexpert.com/discussion/6433354/keeping-net-adjusted-income-below-100k#latest

katieks

@Jeremy535897 Thanks, already read that one.  The way I understand it from that post is that if I pay more into the pension, the limit for higher rate kicking in gets raised so I will pay tax on the amount I overpay into pension but at 40% or 45% instead of 60% marginal rate?   The SEIS relief is the amount that will be subtracted from my tax bill - ie. the 33k over the 100k is taxed at marginal rate of 60% but instead of me paying the ~20k tax on it, the SEIS relief will be deducted from the ~20k amount and I pay the remainder.  Please could you confirm that my understanding is correct?  You really seem to know your stuff in that other post you mentioned.

Jeremy535897

SEIS is a red herring, because it just cuts the ultimate tax payable (a bit like the reverse of the annual allowance charge). See:
https://www.gov.uk/government/publications/seed-enterprise-investment-scheme-income-tax-and-capital-gains-tax-reliefs-hs393-self-assessment-helpsheet/hs393-seed-enterprise-investment-scheme-income-tax-and-capital-gains-tax-reliefs-2022.

Nor is there a marginal rate of tax of 60%. What happens is that the interaction of the loss of personal allowance (£1 for every £2 adjusted net income between £100,000 and £125,140) and the 40% tax rate result in 60p tax for every £1 your income goes up within this band. That's why payments in excess of the annual allowance work. If your adjusted net income is £125,140, and you make a gross contribution of £25,140 into a pension scheme that is in excess of your annual allowance, you reduce your adjusted net income to £100,000, keep all your personal allowance, and then pay 40% tax on the £25,140 as a separate charge. If your adjusted net income is £135,140, you have to pay £35,140 in gross pension contributions to keep your full personal allowance, and the effective tax saving on the extra £10,000 would only be 5% from 2023/24 (nil in 2022/23). EDIT: there won't actually be a 5% saving in 2023/24 as the annual allowance charge will be at the same rate, 45%, on this portion of income, so the higher your adjusted net income is above £125,140, the more the disadvantages will be, as set out below.

There are three reasons to be cautious, when the maximum amount of tax you can save is 20% of £25,140:

• you can't actually spend the money until you reach the relevant age
• you will pay tax on the money when you eventually do take it out (although 25% might be tax free if the lump sum limit is not breached)
• you may fall foul of a lifetime allowance reintroduced by Labour, which would mean that you would have made contributions that saved 20% tax when future contributions might well have saved tax at a higher rate, but you won't be able to make them without some additional penalty

kinger101

There is effectively a marginal tax rate of 60%. Every £1 you earn in that band does result in 60 p of income tax.

But absolutely no point in generating AA excess to avoid it.  Theoretically, it can mean you only pay 40%  tax (under today's rules) but it would be exceptionally unusual for someone with that high a level of income.

For all practical purposes, it would be 40% excess charge now, then maybe just  another 15% in retirement.  And you'd be stuffed I'd LTA was implemented again.  The cashflow disadvantages and LTA problem don't warrant the risk.  

AA excess only makes sense for a finite range of income for those losing nursery benefits.

At some point, you just have to accept you're paying 60% on a slice of your income.