High earnings, SIPP contributions and 60% tax trap

apvit

Hi folks, my first year as a high earner and I do struggle to understand the tax rules and will appreciate your help. If I earn £130k this means my personal allowance is reduced to zero and I fall into the 60% tax trap as I see online. What's the best way to avoid this and reduce taxes? I can potentially pay a lot into SIPP, perhaps a whole £60k, will this mean that I get back all my personal allowance and pay less tax? I also will have perhaps a 1k of interest earnings, if I contribute to SIPP will this move me away from the additional rate band which is zero for personal savings allowance, and will I have the higher rate allowance at £500 allowing me to save a bit more money?

Dazed_and_C0nfused

If your total taxable income is £131k and you contribute £60k (gross) to a SIPP of personal pension then yes you will retain all your Personal Allowance.

And your basic rate band will be increased from £37,700 to £97,700.

And the first £500 of your interest will be taxed at the 0% nil rate band (aka Personal Savings Allowance).

So very tax efficient really.   You end up with £60k in your pension for a lot less than the £48k you originally hand over to the pension company.

But £60k is the annual allowance so any contributions made via your employers scheme (if you're employed) may impact this.  Subject to any unused annual allowance you have available to carry forward.

apvit

I see, amazing, thank you so much for advice

apvit

Hi everyone,

A year has passed since I asked my question, and once again, I’m a bit puzzled by the tax rules.

Let's imagine I have a £165k salary this year as a self-employed individual, with £5k in allowable expenses. I want to be as tax-efficient as possible and, as before, contribute £60k to my SIPP.

Does this mean I will exceed my personal allowance by £5k and fall into the 60% tax trap, or not?

If so, I have the option to move £5k of my earnings to the next tax year by slightly delaying sending the invoice. Is this something legally permissible when you are self-employed?

Strummer22

apvit said:

If so, I have the option to move £5k of my earnings to the next tax year by slightly delaying sending the invoice. Is this something legally permissible when you are self-employed?

I don't see why not, there's all sorts of things people do to avoid tax. Companies too, obviously. What you're proposing is called 'cash-based accounting' (I didn't know this, I just looked it up: https://www.freeagent.com/guides/self-assessment/tax-returns-calculating-your-business-income)

Bear in mind that if you expect your income to be even higher next year, then this isn't really going to help - it's just kicking the can down the road. If you've maxed out your pension contribution and exhausted all other tax efficiencies and you've still lost your personal allowance, maybe it's time to accept that you're rich and be glad to pay the tax on your income - almost everyone else who pays less tax (lucky them!) has a lower income income than you (oh, yeah).

You can always give money away to get tax relief on gift aid donations too.

apvit

Thank you Strummer22. As of now, I consider myself lucky, but I’m by no means rich—I still don’t own a house and am renting. Hopefully, things will change and one day I’ll be happy to gladly accept high taxes!

TheSpectator

apvit said:

Hi everyone,

If so, I have the option to move £5k of my earnings to the next tax year by slightly delaying sending the invoice. Is this something legally permissible when you are self-employed?

Depends if you are using cash or accruals accounting. 

Would have that at your level if income you have an accountant to advise you?

apvit

I use an online accountant, but I’d like to understand it myself so I can optimize things better.

Dazed_and_C0nfused

apvit said:

Hi everyone,

A year has passed since I asked my question, and once again, I’m a bit puzzled by the tax rules.

Let's imagine I have a £165k salary this year as a self-employed individual, with £5k in allowable expenses. I want to be as tax-efficient as possible and, as before, contribute £60k to my SIPP.

Does this mean I will exceed my personal allowance by £5k and fall into the 60% tax trap, or not?

If so, I have the option to move £5k of my earnings to the next tax year by slightly delaying sending the invoice. Is this something legally permissible when you are self-employed?

How are managing to have a salary if you are self employed 🤔

Or are you employed and self employed??

The thing that actually matters is your adjusted net income.  You need to understand that to get this right.

Salary and business turnover are both irrelevant.

The total of all your taxable income (including income taxed at 0% like interest and dividends can be) is your starting point.  Then deduct Gift Aid contributions and any relief at source (RAS) pension contributions.  That is what ANI for most people.

apvit

Apologies, not salary, earnings or whatever is the right word. So the adjusted net income should be below 100,000 to avoid the 60% trap. No gift aid and my SIPP contributions are 48,000 plus 12,000 relief. If as in my example I have £5k in allowable expenses this reduces my adjusted net income and I avoid the trap, correct?

Dazed_and_C0nfused

apvit said:

Apologies, not salary, earnings or whatever is the right word. So the adjusted net income should be below 100,000 to avoid the 60% trap. No gift aid and my SIPP contributions are 48,000 plus 12,000 relief. If as in my example I have £5k in allowable expenses this reduces my adjusted net income and I avoid the trap, correct?

No, you are overcomplicating things.

Your starting point is your taxable income, any expenses have already been deducted to arrive at your taxable profit, which is one element (or maybe the only element) of your taxable income.