Cutting off 60% tax trap

CityLatina

Going around the circles between my HR/Payroll, HRMC and Youtube so here for your rescue please! Thanks in advance.

I am trying to figure out how I can avoid getting trapped by the 60% tax over £100k. My basic salary is £111,200, employee benefit allowance of £7k, annual bonus of £20k (paid 20th April 2023 during 2023/2024 tax year) then again £30k 28th March 2024 (same tax year). I contribute £695 monthly via employer salary sacrifice scheme (net!) to the work DC pension while they contribute about £1621monthly. I have two children under 16s (13y and 15y) for child benefit consideration. I am the breadwinner of the house, no other income.

As such I was thinking to follow the below tax strategy; wondering if it would make sense to you experts:

• Pay the full March 2024 bonus onto the DC work pension
• Given that I cashed out my bonus last April (stupid me!), my annual gross taxable figure in Feb 2024 payslip is £122,644 which when March 2024 pay is made, this figure will bring my annual gross taxable figure to £131,910. Needless to say if I do not do anything I am scheduled to have my tax code changed to 0T which means 'zero tax free allowance'. If I increase my monthly pension contribution from March 2024 to March 2025 to £2090 (£23k per year) then in May 2024 submit an adjusted net income for tax year 2024-2025 makes sense? All I want to do is to reduce my taxable income down to £100k. Or because I was stupid to cash out my bonus last year I will have to ride out the upcoming tax year 2024-2025 with no personal tax allowance then to reset it in April 2025?
• Regardless I have no idea how I could avoid paying 60% on above £100k annually if my basic salary is £111k and my pension contributions are net paid? Does it mean that every year I will get trapped? Can I not contribute the excess of £100k onto my work pension to remove this tax trap?

Dazed_and_C0nfused

I think you've got a little confused, and are using two sets of figures when only one is needed.

At the moment you aren't contributing anything to a pension, you are agreeing to a reduced salary in return for additional employer contributions.  You don't get any pension tax relief with employment contributions.  But you avoid paying tax and NI on the amount sacrificed.

I've ignored the first set of figures as they are irrelevant given the second set.

If you sacrifice the whole of the March bonus and your P60 shows taxable earnings of £131,910 then you Wil lose all your Personal Allowance as you have made no pension contributions (or Gift Aid donations) which would reduce your adjusted net income.

Anything you do in the 2024-25 tax year pension contribution wise is of no relevance to your 2023-24 tax liability and will not help you avoid loss of your 2023-24 Personal Allowance.

You cannot have an 0T tax code retrospectively for 2023-24, any tax due will be determined from your Self Assessment tax return and will be payable by 31 January 2025.  If you file the return by 30 December it's sometimes possible to pay the Self Assessment liability via your 2025-26 tax code but that is highly unlikely to be applicable here as the limit is £2999.99 and from what you've posted you will owe more than that.

Your Personal Allowance is not based on your taxable income, it's your adjusted net income which counts and that can be reduced by both Gift Aid donations and relief at source pension contributions.  You also need to add in any other taxable income, even if it's taxed at 0%.

You still have time to make relief at source contributions in the current tax year but you would need to consider the pension contribution annual allowance and if you have any unused annual allowance available to carry forward.

CityLatina

Thank you, it is all so confusing! Sorry not your fault, it is appalling that calling HRMC, asking HR/Payroll seems is pointless as they appear to be scared to be seeing as 'providing financial advise'... rant over.

What would it be the most tax efficient thing to do? 

I thought I would spear the tax burden on my taxable earnings sacrificing my march 2024 bonus. It would be £131,910 regardless thats composed by basic salary, April 2024 bonus cashed in plus this months normal payroll taxable figure. 

Do you think that it is possible to reduce/lower my taxable earnings by cashing out my March 2024 bonus and use it towards a relief at source pension contribution (it would have to be soon!) onto my work pension then submit an adjusted net income form say May 2024? 

CityLatina

Sorry I forgot to mention I would have used £27,800 of the annual £60k during this tax year (mine and employer's contribution). 

On another note, do you own a company that provide personal tax advise or recommend one? All those I checked require an income over £200k.

Dazed_and_C0nfused

CityLatina said:

Thank you, it is all so confusing! Sorry not your fault, it is appalling that calling HRMC, asking HR/Payroll seems is pointless as they appear to be scared to be seeing as 'providing financial advise'... rant over.

What would it be the most tax efficient thing to do? 

I thought I would spear the tax burden on my taxable earnings sacrificing my march 2024 bonus. It would be £131,910 regardless thats composed by basic salary, April 2024 bonus cashed in plus this months normal payroll taxable figure. 

Do you think that it is possible to reduce/lower my taxable earnings by cashing out my March 2024 bonus and use it towards a relief at source pension contribution (it would have to be soon!) onto my work pension then submit an adjusted net income form say May 2024? 

I think you're getting more confused!

If you don't sacrifice the March bonus then your taxable income will be increased by £30k.

For simplicity say you receive £15k of that after tax and NI.

You pay the £15k into a SIPP or personal pension and that becomes £18,750 with basic rate tax relief added.  

So you've added £30k of taxable income to your ANI and then knocked of £18,750.  A net increase in your ANI of £11,250.

That seems counter intuitive.

Do you have sufficient annual allowance (and cash) available to sacrifice the £30k and make separate contributions to a SIPP or personal pension? 

If not then it's looking like you have lost your Personal Allowance for the current tax year and could have a tax liability approaching five figures.  And that's five figures ignoring the pence 😳.

CityLatina

You have gifted me with a worrisome night sleep

Well, the only thing I did was getting a payrise in April 2023 and cashed my April 2023 bonus to then being penalised for my hard work sounds very unfair to me.

What do you mean by "Do you have sufficient annual allowance (and cash) available to sacrifice the £30k and make separate contributions to a SIPP or personal pension?" Yes, I still have £32,200 from my Personal Allowance for 2023-2024. Do you mean putting £15k of the March 2024 bonus then cash £15k both into a SIPP before 5th April 2024?

Dazed_and_C0nfused

CityLatina said:

You have gifted me with a worrisome night sleep

Well, the only thing I did was getting a payrise in April 2023 and cashed my April 2023 bonus to then being penalised for my hard work sounds very unfair to me.

What do you mean by "Do you have sufficient annual allowance (and cash) available to sacrifice the £30k and make separate contributions to a SIPP or personal pension?" Yes, I still have £32,200 from my Personal Allowance for 2023-2024. Do you mean putting £15k of the March 2024 bonus then cash £15k both into a SIPP before 5th April 2024?

I'm at a bit of a loss as to why you are considering making contributions to your personal pension with any of the March bonus?

What is the point of adding to your taxable income and, irrespective of the Personal Allowance position, paying at least 42% tax and NI on it.

The problem seems to be that even if you sacrifice the whole £30k (in return for additional employer contributions) then have very little scope, within this years annual allowance, for any personal contributions to a SIPP.

CityLatina

What do you mean by "Do you have sufficient annual allowance (and cash) available to sacrifice the £30k and make separate contributions to a SIPP or personal pension?" in practice? I sincerely do not understand whats the steps I should take to achieve this.

Dazed_and_C0nfused

CityLatina said:

What do you mean by "Do you have sufficient annual allowance (and cash) available to sacrifice the £30k and make separate contributions to a SIPP or personal pension?" in practice? I sincerely do not understand whats the steps I should take to achieve this.

If you do nothing but sacrifice the March bonus then you will still have taxable income of nearly £132k and have made no pension contributions which would reduce your adjusted net income.

That would result in the full loss of your Personal Allowance meaning you suffer the effective 60% tax trap you seem to be trying to avoid.

Your annual pension allowance is £60k and although you have contributed nothing nearly £58k has been used by employer contributions.

So with this years annual pension allowance you have no scope to reduce your ANI to below £125,140 (where tapering of the Personal Allowance would start to be mitigated).

But it might be possible if you have unused annual allowance available to carry forward from any of the previous 3 years.
NB.  The annual allowance was only £40k in each of the previous 3 years.

You might find this worth a read.

https://www.mandg.com/wealth/adviser-services/tech-matters/pensions/annual-allowance/annual-allowance-carry-forward

CityLatina

Thanks. I am not sure where you got the £58k. I still have £32,200 from my Personal Allowance for 2023-2024 as both myself and my employer contributed £27,800.

Why would people have bonus if they do not cash it out? We (those salaried over £100k) are supposed to always defer our bonuses and tuck them into a SIPP if our employer doesn't offer a RAS pension scheme? 

I cannot comprehend why am due to pay that said tax if my basic salary is £111k, cashed 20k bonus during the tax year? That sounds bizarre... maybe I am too much of a lawyer to navigate through tax laws!

Dazed_and_C0nfused

I am not sure where you got the £58k. I still have £32,200 from my Personal Allowance for 2023-2024 as both myself and my employer contributed £27,800.

Based on your earlier you posts you have not contributed a penny. 

You have sacrificed £695 of your salary in return for additional employer contributions and your employer contributes a further £1,621/month.

And I'd assumed you would sacrifice the £30k bonus.

£695 x 12 = £8,340
£1,621 x 12 = £19,452

£8,340 + £19,452 + £30,000 = £57,792

I don't know why you would use your employers RAS scheme if salary sacrifice is available?  Are you sure they even have a RAS scheme.  A lot of employers offer one or the other, not both.  Other than for low earners salary sacrifice beats RAS and is a lot simpler, no need to involve HMRC and you avoid tax and NI on the amount sacrificed.  There is no NI saving with RAS contributions.

The amount of tax you will owe depends on several factors but based on your op I'm assuming you have been receiving the benefit of the full Personal Allowance via your tax code and as things stand there seems to be very little chance of you avoiding the full taper of the Personal Allowance down to £0 for the current tax year.