Self Assessment Question

Flixton86

Hi - hoping someone can help me please.

My adjusted net income for this tax year is going to be around £120,000.

Am I right in thinking that my self assessment tax bill on this amount would be £4,000? (40% tax on a £10,000 reduction of my personal allowance?).

Second question is that if I paid this £4,000 into my work pension now before the end of the tax year, would that then mean that I have no self assessment bill to pay?

Thanks.

Dazed_and_C0nfused

Flixton86 said:

Hi - hoping someone can help me please.

My adjusted net income for this tax year is going to be around £120,000.

Am I right in thinking that my self assessment tax bill on this amount would be £4,000? (40% tax on a £10,000 reduction of my personal allowance?).

Second question is that if I paid this £4,000 into my work pension now before the end of the tax year, would that then mean that I have no self assessment bill to pay?

Thanks.

No and no.

You would also have an extra £10k taxed at 40% instead of 20%.

Paying £4,000 would result in a gross contribution of £5,000 (assuming it's a relief at source scheme).

That would give you back £2,500 of your Personal Allowance so there would be some tax saving but not nearly enough t lo mitigate things completely.

You would be paying £16k (net) to have a more realistic chance of achieving your aim.

Flixton86

Ok thank you.

So what is my self assessment bill likely to be then?

I thought you lost £1 for every £2 over £100k, and then paid 40% tax on that, so in my case 40% on £10,000?

BoGoF

Flixton86 said:

Ok thank you.

So what is my self assessment bill likely to be then?

I thought you lost £1 for every £2 over £100k, and then paid 40% tax on that, so in my case 40% on £10,000?

Yes, that is solely on the lost PA. But by losing £10k PA you start paying 40% tax earlier....£10k earlier so an extra 20% on £10k.

That is why they say the marginal rate over £100k is effectively 60%.

Flixton86

Ah I see. So a £6k tax bill.

If I still pay the £4k into my work pension now (6% is deducted from my pay every month usually), am I right in thinking the tax bill reduces to £3.6k? 

Albermarle

Not directly relevant, but only paying in 6% to a pension is rather low, and will almost certainly result in an inadequate retirement pot. Unless your employer is very generous and adding >20%.

So increasing pension contributions seems like a good idea all round.

FlimFlam01

you'll pay 60% tax on the amount between £100k and £120k so you'd only keep 8k and pay 12k tax.  Far better option if you can manage it is to pay £16k into a pension and get the tax relief to take it up to £20k contribution - effectively a 20k pension contribution for £8k (which is nice).  Assuming here I've done my calculations right.