60% tax trap

mac123

hi all … I’m not looking for sympathy or the ‘you earn enough you should pay your way’ comments please I’m simply asking what my options are

My taxable income this year will be £122k even with me maxing pension annual allowance and a small amount of remaining carry forward 

what are my options for further reducing my taxable income to minimise the impact of the effective 60% tax rate 

thanks and happy new year

Flugelhorn

you deffo won't get the "you earn enough you should pay your way’" comments from me - I am retired now but still trying to work out why I was mad enough to do extra sessions and only get <40% on them.  SLAGIATT

TBH I am not sure what you can do - other than just pay up or reduce hours (not always possible) - or, as I ultimately did, ignore the sight of all deductions on the payslips and just readjust mindset to the fact that:

"this net income is the amount I get paid for this job"  

Jeremy535897

mac123 said:

hi all … I’m not looking for sympathy or the ‘you earn enough you should pay your way’ comments please I’m simply asking what my options are

My taxable income this year will be £122k even with me maxing pension annual allowance and a small amount of remaining carry forward 

what are my options for further reducing my taxable income to minimise the impact of the effective 60% tax rate 

thanks and happy new year

There is apparently one way to do it, but it's not for the faint hearted. You simply overpay into your pension. You exceed the annual allowance.

What then happens? Put very simply, you declare an "annual allowance charge" on your tax return. You can get the pension fund to pay it in some circumstances. Say you pay an extra £22,000 gross. Your adjusted net income drops to £100,000. You or your pension scheme then pay tax, based on your marginal rate on the excess contribution. The tax rate from £100,000 to £122,000 is 40%. You basically keep the personal allowance that would otherwise be lost. It does mean it will cost more tax to get the extra money out of the pension scheme in the long run. Here's more detail. Check out the annual allowance charge tab on the left:

https://www.mandg.com/pru/adviser/en-gb/insights-events/insights-library/annual-allowance

MEL1981

I'm in a similar position to the OP. Just at the top end of taxable earnings circa 120k after maxing out pension contributions etc. This option from Jeremy is very interesting, and would be a simple way out of the 60% tax trap - just exceed the annual allowance and pay the rate back through tax return as "annual allowance charge" at the nominal, and not the effective tax trap tax rate!? Has anyone done this? Am I missing something here why it's not more common?

Thanks
An uninformed tax person

nyermen

Hopefully you won't get many if any of those comments.  Part of the issue is people see "120K" and think wow vs eg. 60k and people on 30k think wow/double wow vs both. 
But various items from tax credits through to tax free childcare through to the 30 hours free childcare elements makes it totally incomparable.

At 120K, with 2 children in childcare, you will have less money left than if you earned less than 100k as the "tax rate" (due to the sudden loss of eligibility for childcare support) is over 100% rate, which is a silly policy to have (especially when two household earners on £99,999 get full support, vs 1 on £100,000.01 getting nothing.

It's a situation where people are better off financially by refusing a promotion/pay rise (which would normally come with more responsibility/stress/etc too).  

IamWood

@mac123

Have you found any tips? I am in the same boat as you are.

Any advice/comments are welcome.

Cheers.

zaber86

My congratulations on earning a terrific income. I mean that genuinely. Sadly I am far from having this high quality problem myself.

I have a couple of ideas that might help, am not a tax adviser, just a layman who has NOT looked into these, so you will have to do your own due diligence.

As you have said you have already maximised your pension allowance. 

• Would it be possible for you to sign up to an Electric Car scheme at work? I'm not 100% but that might lower your income, in the same way as salary sacrifice pension contributions? Or is there other salary sacrifice schemes that complies with tax regulations? this and the Cycle to work schemes are the only two I know of.

• Another option might be paying for (if you have any) your Children's Private Education? I believe that they are charities so effectively reducing your income? 

Both of these are expenses, but if allowed they, I believe, would lower your taxable income. As I said though it's not something I have ever researched more than surface level.

Jeremy535897

zaber86 said:

My congratulations on earning a terrific income. I mean that genuinely. Sadly I am far from having this high quality problem myself.

I have a couple of ideas that might help, am not a tax adviser, just a layman who has NOT looked into these, so you will have to do your own due diligence.

As you have said you have already maximised your pension allowance. 

• Would it be possible for you to sign up to an Electric Car scheme at work? I'm not 100% but that might lower your income, in the same way as salary sacrifice pension contributions? Or is there other salary sacrifice schemes that complies with tax regulations? this and the Cycle to work schemes are the only two I know of.

• Another option might be paying for (if you have any) your Children's Private Education? I believe that they are charities so effectively reducing your income? 

Both of these are expenses, but if allowed they, I believe, would lower your taxable income. As I said though it's not something I have ever researched more than surface level.

Paying private school fees does not reduce your income for tax purposes. They may be charities, but as you are getting a service in return for your payment, the school fees are not donations.