Bringing net income to below 100k

justpassingthrough24

Hi everyone. In summary, I'm self-employed. I've worked extremely hard this year, picking up extra shifts etc in order to save for a house. My gross income for the 23/24 year is now more than it has ever been - a large amount more than my income from last year and I'm now a top rate taxpayer. All my deposit money is also in a savings account and earning interest, which I'm aware will be added to my gross income and be taxed. (I had opened an ISA but probably did this too late which was my mistake).

I figured the only way I can reduce my huge tax bill is by putting some money in my SIPP. However I just want to understand the actual benefit of bringing your net income to 100k - I'm aware once you earn over this amount, the effective tax rate is 60%. More for me as I have a student loan too.

I will give example figures rather than my actual earnings, just feels wrong even though this is anonymous!

Say my gross income is 150k. I could put 50k in a SIPP and bring my income to below 100k. However with my upcoming house purchase, sticking such a large amount in a SIPP doesn't seem right unless I actually get benefits from the tax saving. (I should say I will be able put together enough for a deposit even if I did put 50k in the SIPP).
If I was to stick in 30k in instead, to bring the gross income to 120k, I am technically "saving 20k" by it not going into my SIPP. However I can't figure out whether this saving is worth it, or whether sticking 50k works out better because of the tax relief that comes with it for my payments in July 2024 and January 2025?

I'm sorry that this is a lengthy post and hope it does make sense.
Thanks in advance.

[Deleted User]

Are you aware that ‘sticking in’ £30000 into your SIPP results in a gross contribution of £37500 after BR tax relief is claimed by your provider? 

Your adjusted net income will reduce by £37500.

justpassingthrough24

[Deleted User] said:

Are you aware that ‘sticking in’ £30000 into your SIPP results in a gross contribution of £37500 after BR tax relief is claimed by your provider? 

Your adjusted net income will reduce by £37500.

Yes sorry I should've clarified I meant 30k including the government contribution.

I didn't mean to sound so blase by using the words "sticking in". Apologies if it's offended as I know I'm taking about large sums of money.

[Deleted User]

Absolutely no question of offence- just using your terminology. 

So - contributing £50000 gross (£40000 net) reduces your ANI by £50000. 

You will be entitled to additional tax relief of £25140 @40% plus £24860 @ 25% - £16271. 

However, your payments on account for 2023/34 are based on your tax liability for 2022/23 - probably best to leave alone if your income has increased substantially. 

The big saving, of course, is that £50000 has gone into your pension at a cost to you of approximately £23700. 

justpassingthrough24

[Deleted User] said:

Absolutely no question of offence- just using your terminology. 

So - contributing £50000 gross (£40000 net) reduces your ANI by £50000. 

You will be entitled to additional tax relief of £25140 @40% plus £24860 @ 25% - £16271. 

However, your payments on account for 2023/34 are based on your tax liability for 2022/23 - probably best to leave alone if your income has increased substantially. 

The big saving, of course, is that £50000 has gone into your pension at a cost to you of approximately £23700. 

This makes sense, thank you. Seems to be a no brainer to just put in the max amount.

How would I work out the savings for 30k in a SIPP and a net income of 120k? I'm struggling to work out the immediate cost saving - may be straightforward but maths/tax etc is not my strong point 

Dazed_and_C0nfused

I presume you are aware that SIPP contributions are made using the relief at source method so they don't reduce the amount of taxable income.

Your £150k, which I presume is your profit, would still all be taxable.

Despite this there are three key benefits in your situation from RAS contributions.

1.  You get basic rate relief added by the pension company (25% of your net contribution).  So if you handover £30k your pension will have £37,500 in it.

2.  Your basic rate band is increased by the amount of the gross contribution, meaning more income can be taxed at 20% and less at 40%.

3.  Your adjusted net increase is reduced by the amount of the gross contribution.  ANI is what determines your Personal Allowance so getting your ANI down to £100k means you don't lose any Personal Allowance.

HappyHarry

It is worth noting that the 60% tax trap is due to your personal allowance being eroded by £1 for every £2 of your income over £100,000 but it can’t be reduced below £0.

This means that it is only earnings between £100.000 and £125,140 that get this tax hit.

Reducing your ANI to £120,000 is far less tax efficient than reducing it to £100,000.

[Deleted User]

HappyHarry said:

It is worth noting that the 60% tax trap is due to your personal allowance being eroded by £1 for every £2 of your income over £100,000 but it can’t be reduced below £0.

This means that it is only earnings between £100.000 and £125,140 that get this tax hit.

Reducing your ANI to £120,000 is far less tax efficient than reducing it to £100,000.

Yes - I factored that in in my £50000 calculation. 

A £30k gross contribution would attract additional relief of £5140 at effective 40% (60-20) rate and £24860 at 25% (45-20). 

Nowhere near as tax efficient. 

All of this ignores any additional savings, dividend income etc. 

Grumpy_chap

justpassingthrough24 said:

Hi everyone. In summary, I'm self-employed. I've worked extremely hard this year, picking up extra shifts etc in order to save for a house. My gross income for the 23/24 year is now more than it has ever been 

Just to clarify, you are self-employed sole-trader (not Director of your own Ltd Co.)?
By "gross income", do you mean the total revenue to your self-employed trade or your income after allowable business expenses have been deducted?

justpassingthrough24

Grumpy_chap said:

justpassingthrough24 said:

Hi everyone. In summary, I'm self-employed. I've worked extremely hard this year, picking up extra shifts etc in order to save for a house. My gross income for the 23/24 year is now more than it has ever been 

Just to clarify, you are self-employed sole-trader (not Director of your own Ltd Co.)?
By "gross income", do you mean the total revenue to your self-employed trade or your income after allowable business expenses have been deducted?

Yep, I'm self-employed as a sole trader. By gross income I mean the gross earnings from self-employed trade and bank interest. I don't get any income elsewhere. I'm also not factoring in business expenses, but this only gives me around £1000-2000 tax relief.

Going forward I'm considering becoming a limited company within the next couple of months now that I've saved enough for a deposit, but I know I'd need to sit down with an accountant to figure out if this is worth it.

The tax is just killing me.

Grumpy_chap

I don't understand the comment "saved enough for a deposit" with respect to becoming a Ltd Co.  The costs of setting up a Ltd Co. are minimal.  There are pros- and cons- of both sole-trader and Ltd Co. operation.  It really is worth discussing with an Accountant.

What type of trade do you work in that you have sole-trader income in the order of £150k yet only £2k allowable expenses?  Even if you are in a "desk job" professional services, I'd expect there to be further allowable expenses to consider.  Again, discussing with an Accountant will give you guidance on what is appropriate.

You mentioned that your gross income this year has been much higher than previous years.
This year around £150k gross sole-trader income (assuming the interest is a smaller fraction of the total).
What was your turn-over type level in previous years?
When did you register for VAT?
To clarify, the £150k sole-trader income is total excluding VAT, or total including VAT?