How can I make 200K taxable income tax-efficient

IamWood

I appreciate this is a nice problem to have.

This year, my total compensation from work is expected to exceed 200K. I've taken advantage of the salary sacrifice scheme to maximize my pension contribution. However, I'm interested in exploring advice to make my salary more tax-efficient.

Any advice or suggestions would be greatly appreciated.

I've already made substantial contributions to charity.

Cheers

artyboy

If tax efficiency is the prime objective, do you have available pension allowance from the past 3 years you can carry forward - if you can't salsac any more then you could always open a separate SIPP and pay into that? Ideally get your taxable income as close to or below £100k so you avoid the 47% and 62% tax slices...

When you say 'exceed' - how much above £200k? Once you get beyond £240k, your annual allowance will be affected by tapering rules.

El_Torro

The only obvious thing you haven't listed is ISA contributions. This won't reduce the tax you pay on your income, at least future growth will be tax free though. 

Are you married? There are some things you can do if so. 

Other than pensions and ISAs there are other things which come up in these types of conversations. VCTs mainly. I have not looked closely into VCTs myself (don't need to) but from what I hear they're pretty risky investments, even though they're tax efficient.

IamWood

artyboy said:

If tax efficiency is the prime objective, do you have available pension allowance from the past 3 years you can carry forward - if you can't salsac any more then you could always open a separate SIPP and pay into that? Ideally get your taxable income as close to or below £100k so you avoid the 47% and 62% tax slices...

When you say 'exceed' - how much above £200k? Once you get beyond £240k, your annual allowance will be affected by tapering rules.

I used up my carry-forward last year. I don't think there is any left for me to play with.

My income is just above £200k and below 240K.

What would happen if my pension contribution through salary sacrifice of this year is over £60K?

jamesd

Venture Capital Trusts may be your next stop, commonly coming into play after pension contributions, with those formerly limited by lifetime allowance charge risk.

VCTs are collective investments listed on the London Stock Exchange just like investment trusts. They range in risk from high risk by specialising in firms from very early startups to far safer companies looking for growth but all are relatively small and higher risk than mature companies. A VCT will commonly hold around a hundred different companies and expect a few to fail while the rest are eventually sold.

VCTs get 30% of the purchase price refunded by HMRC. This must be repaid if you sell within five years so thinking of it as a rotating five year pot can work. Start years one to five just buying then from six onwards sell to buy that year and keep any excess. This is capped at the amount of tax you would have paid in the year.

Dividends are typically 5% of value, 7.1% of your after tax relief purchase price. Funded by sales of the companies invested in. Special dividends after large exits happen too; Albion VCT paid out something like a third of its total value a few years ago after three big sales. Because these dividends are tax exempt most VCTs look to use them instead of having capital growth and it's not uncommon to pay out enough for capital value to fall slowly for many years.

When it comes to selling time the biggest can have quite liquid markets and sell at or a bit above last quoted price but most will be quite illiquid and you may rely on optional but usually regular buybacks from the VCT itself. These are commonly made at a discount to the current value, commonly 5-10% but sometimes nil. It's a matter of VCT policy not law.

Say someone wanted to do what I'm doing and eliminate most or all of their basic rate income tax liability. They might buy VCTs costing £27,000. 30% relief on this is £8,100. That's equal to the income tax on £40,500 at 20% basic rate. Can be delivered by PAYE but tax return claims seem more practical. £50,270 is top of the normal basic rate band with personal allowance but pension contributions into RAS schemes (not salary sacrifice or net pay) increase this by the gross contribution value and can make £40,500+£12570=£53,070 still basic rate. That's why I buy more than the usual basic rate's worth of VCTs.

VCT buying normally has a £1,000 - £5,000 minimum purchase and sometimes £1,000 or £500 increment so precise matching can be fiddly or impractical.

Say you have that same basic rate range situation and want to start covering higher rate tax too. Buy another £27,000 but the £8,100 of tax relief only covers £20,250 of higher rate income tax. Twice the buy needed per Pound of higher rate income as basic rate.

The capital cost of the buys for a lot of higher rate income can get substantial and so will the total held for a five years rolling scheme: £94,000 for the basic rate I described but three times that for the same amounts of both higher and basic rate income. This can make the cost of fully doing it prohibitive initially and may also lead to an excessive total very small company investment amount compared to total assets.

jamesd

IamWood said:

I used up my carry-forward last year. I don't think there is any left for me to play with.

My income is just above £200k and below 240K.

What would happen if my pension contribution through salary sacrifice of this year is over £60K?

You can carry forward unused annual allowance from the previous three years. HMRC has a calculator linked from https://www.gov.uk/guidance/check-if-you-have-unused-annual-allowances-on-your-pension-savings . Don't tell HMRC that you're using carry-forward, they will see it themselves.

If you exceed the annual allowance and carry-forward you declare the excess in your tax return and HMRC will increase your taxable income by this to make the Annual Allowance Charge on that excess.

It's not worth the paperwork aggravation to knowingly exceed the allowance you have available.

jamesd

El_Torro said:

... VCTs mainly. I have not looked closely into VCTs myself (don't need to) but from what I hear they're pretty risky investments, even though they're tax efficient.

In my experience the risk is overstated and I've experienced tamer results than a normal equity tracker by doing nothing more fancy than picking VCTs concentrating on later stage companies. That includes holding through the very nasty for many small companies covid-19 years. The initial 30% back from HMRC and the typical dividends also mute the potential volatility a fair bit.

Both VCTs and equity trackers are classed as high risk and it's sensible to place a reasonable limit on total smaller and micro company investments because of their potential volatility.

I'm no genius, just making the sort of lower of the VCT risk end picks and diversifying the VCTs I use that anyone could do, if a suitable part of their own mixture.

jamesd

There is one trick with annual allowance that may later matter to you: combining high and low contribution years. If even contributions of £60k would still leave you over a threshold like £240k you can accept being over it for say a year of nil then three years of splitting that unused £60k to allow you £80k a year and stay below. Whatever combination does the job.

Avoiding the Child Benefit tax charge is a more common use for this trick.

IamWood

El_Torro said:

The only obvious thing you haven't listed is ISA contributions. This won't reduce the tax you pay on your income, at least future growth will be tax free though. 

Are you married? There are some things you can do if so. 

Other than pensions and ISAs there are other things which come up in these types of conversations. VCTs mainly. I have not looked closely into VCTs myself (don't need to) but from what I hear they're pretty risky investments, even though they're tax efficient.

Thanks, I contribute to ISA.

Yes, I'm married with two children.

Will check VCTs. Thanks

Grumpy_chap

IamWood said:

I used up my carry-forward last year. I don't think there is any left for me to play with.

My income is just above £200k and below 240K.

What would happen if my pension contribution through salary sacrifice of this year is over £60K?

Generally, exceeding permitted annual allowance (plus carry forward) contributions to pensions is not recommended.

However, your current situation is £200k less £60k pension contributions = £140k
Less £XX donations to charity.
What is your ANI considering these elements?
I ask because another regular, knowledgeable and respected contributor to these forums wrote in a recent post about how exceeding annual allowance pension contributions (so avoiding the 60% taper band) can work out beneficial in the long run.  If I understood correctly, it was hinged around the pension withdrawal needing to be within the basic rate band.
Hopefully, that poster will see this and comment on your position.
I will try to find the previous thread where the approach was mentioned.  It may differ in detail from your position so may not be relevant.  It may be worth you engaging professional (paid) advice to assess.

EDIT:  Here is the other thread I was referencing.  It seems as though I may have described the detail incorrectly / incompletely:
https://forums.moneysavingexpert.com/discussion/comment/80495333#Comment_80495333

Marcon

IamWood said:

I appreciate this is a nice problem to have.

This year, my total compensation from work is expected to exceed 200K. I've taken advantage of the salary sacrifice scheme to maximize my pension contribution. However, I'm interested in exploring advice to make my salary more tax-efficient.

Any advice or suggestions would be greatly appreciated.

I've already made substantial contributions to charity.

Cheers

Maybe spend some on good quality, properly informed financial advice, based on a full understanding of all your circumstances?