Pension question
Discussion
theboss said:
if you're only likely to exceed the extortionate marginal tax bracket by a small margin then it's simply not worth breaching it in the first place.
For the avoidance of any misunderstanding, Income Tax isn't like Stamp Duty. If you earn £10 into the 40% band you only pay tax at 40% on that £10. Income between the 0% personal allowance and the 40% threshold is still taxed at 20%.I recognise that some benefits and allowances are reduced once you go through certain thresholds. That's what causes the oddity, for instance, of an effective c.60% tax rate from £100k to £120k before the rate falls back to 40% from £120k to £150k. The income tax system today is ridiculously complicated.
I think I'm right in saying that most benefits aren't "sudden death" when you cross a threshold. For instance, on Child Benefit the tax charge is 1% of the Child Benefit received for every £100 that your individual income is over £50,000. In other words, Child Benefit scales down from 100% to 0% between incomes of £50,000 and £60,000 p.a.
Ozzie Osmond said:
theboss said:
if you're only likely to exceed the extortionate marginal tax bracket by a small margin then it's simply not worth breaching it in the first place.
For the avoidance of any misunderstanding, Income Tax isn't like Stamp Duty. If you earn £10 into the 40% band you only pay tax at 40% on that £10. Income between the 0% personal allowance and the 40% threshold is still taxed at 20%.I recognise that some benefits and allowances are reduced once you go through certain thresholds. That's what causes the oddity, for instance, of an effective c.60% tax rate from £100k to £120k before the rate falls back to 40% from £120k to £150k. The income tax system today is ridiculously complicated.
I think I'm right in saying that most benefits aren't "sudden death" when you cross a threshold. For instance, on Child Benefit the tax charge is 1% of the Child Benefit received for every £100 that your individual income is over £50,000. In other words, Child Benefit scales down from 100% to 0% between incomes of £50,000 and £60,000 p.a.
Take the child benefit example as above, for me with 3 children the 1% reduction for every £100 equates to approximately 25p in the pound paid back. This is on top of the 46% marginal tax rate which now applies to dividend income at the higher rate (this is the combination of 20% corporation tax plus the 32.5% paid on the net dividend).
So when my income hits £50k I have the choice of paying myself more, on the understanding that for the next £10k I'll only see 29p in the pound.
If my income is only likely to hit £60k then there is absolutely no incentive whatsoever to earn any of the additional £10k at such a punative marginal rate of tax. I'd rather take a long holiday instead, or (if sensible) sacrifice the income for pension contributions for which I'd potentially see the whole £10k in the pension instead of £2.9k in my pocket.
If my income potential is more like £200k then obviously I'm not going to let the child benefit removal get in the way, I'm going to just suck it up and consider it an annoyance, along with the allowance removal and the additional rate I'd be paying at that level.
Exactly the same situation might apply if I earn £100k on the nose, but had the potential to earn £120k with overtime. I'd look at the marginal rate taking into account the removal of the personal allowance, and decide it probably wasn't worth trying to earn the additional £20k, or would divert it all to the pension to ensure the gain was worth the effort.
Edited by theboss on Wednesday 6th April 15:31
theboss said:
If my income is only likely to hit £60k then there is absolutely no incentive whatsoever to earn any of the additional £10k at such a punative marginal rate of tax. I'd rather take a long holiday instead...
I think you are a rare case.Most people can't decide to work less, they just get paid for regular hours and get a raise/promoted if they are good and work hard.
They can't say "thanks for the pay rise, I am going to take an extra two weeks of holiday now".
Although I wish we could!!!
Ozzie Osmond said:
I recognise that some benefits and allowances are reduced once you go through certain thresholds. That's what causes the oddity, for instance, of an effective c.60% tax rate from £100k to £120k before the rate falls back to 40% from £120k to £150k. The income tax system today is ridiculously complicated.
I think I'm right in saying that most benefits aren't "sudden death" when you cross a threshold. For instance, on Child Benefit the tax charge is 1% of the Child Benefit received for every £100 that your individual income is over £50,000. In other words, Child Benefit scales down from 100% to 0% between incomes of £50,000 and £60,000 p.a.
Is the bracket not now £100k and £122k ie double the personal allowance? Is it not also still on a taper similar to the child benefit one ie for every £2 over you lose £1 of your personal allowance?I think I'm right in saying that most benefits aren't "sudden death" when you cross a threshold. For instance, on Child Benefit the tax charge is 1% of the Child Benefit received for every £100 that your individual income is over £50,000. In other words, Child Benefit scales down from 100% to 0% between incomes of £50,000 and £60,000 p.a.
This applies to all high rate earners not just those on 40%.
walm said:
theboss said:
If my income is only likely to hit £60k then there is absolutely no incentive whatsoever to earn any of the additional £10k at such a punative marginal rate of tax. I'd rather take a long holiday instead...
I think you are a rare case.Most people can't decide to work less, they just get paid for regular hours and get a raise/promoted if they are good and work hard.
They can't say "thanks for the pay rise, I am going to take an extra two weeks of holiday now".
Although I wish we could!!!
And many self employed people may also turn down work if they get little value post-tax from it.
\take yourself out of the PAYE world.
theboss said:
the combination of 20% corporation tax plus the 32.5% paid on the net dividend.
You can't really add those together quite that simply, although I understand your point. In particular, Corporation tax is paid on profit "after expenses". Also there's the £5,000 of tax free dividend income.theboss said:
...divert it all to the pension to ensure the gain was worth the effort.
As you rightly say, this is a popular option - suppressing higher rates of income tax by making pension contributions. It's particularly useful for people who can get tax relief at 40% on their contributions but will pay only 20% tax on their eventual pension (and there's 25% tax free lump sum as well).oyster said:
But things like promotions often come with increased workloads.
And many self employed people may also turn down work if they get little value post-tax from it.
\take yourself out of the PAYE world.
Perhaps they do, although not in my experience, it's usually more responsibility and different work. And many self employed people may also turn down work if they get little value post-tax from it.
\take yourself out of the PAYE world.
In any case, only 15% of the workforce is self employed (4.6m 2014 data).
And very few of those are going to be facing these kinds of huge jumps in tax, given the average wage.
So I maintain that theboss is relatively unusual.
walm said:
theboss said:
If my income is only likely to hit £60k then there is absolutely no incentive whatsoever to earn any of the additional £10k at such a punative marginal rate of tax. I'd rather take a long holiday instead...
I think you are a rare case.Most people can't decide to work less, they just get paid for regular hours and get a raise/promoted if they are good and work hard.
It's quite a different perspective - and mentality - from the PAYEer who gets a payslip and a lump of dosh tax paid in his bank account each month. One has security (sort of) the other has freedom (sort of).
Simpo Two said:
But many people are self-employed and therefore can control, to a certain extent, what they earn. I think the 20% band doesn't bother people too much but the view from just under the 40% threshold is 'Hmm, over that I have to do 100% of the work but only get 60% of the reward. Is it worth turning out or shall I mow the grass instead?'.
It's quite a different perspective - and mentality - from the PAYEer who gets a payslip and a lump of dosh tax paid in his bank account each month. One has security (sort of) the other has freedom (sort of).
1. It's doing 100% of the work but shifting from getting 80% of the reward to getting 60% of the reward. If you earn say £20 an hour, your last hour in the pre-40% bracket will earn you £16 but that drops to £12 an hour when you jump into 40%.It's quite a different perspective - and mentality - from the PAYEer who gets a payslip and a lump of dosh tax paid in his bank account each month. One has security (sort of) the other has freedom (sort of).
2. Once again, remember who earns what. 15% are self-employed and only 18% pay HIGHER than the basic rate. So you are talking about a tiny minority of people who have that freedom to mow rather than earn.
walm said:
Simpo Two said:
But many people are self-employed and therefore can control, to a certain extent, what they earn. I think the 20% band doesn't bother people too much but the view from just under the 40% threshold is 'Hmm, over that I have to do 100% of the work but only get 60% of the reward. Is it worth turning out or shall I mow the grass instead?'.
It's quite a different perspective - and mentality - from the PAYEer who gets a payslip and a lump of dosh tax paid in his bank account each month. One has security (sort of) the other has freedom (sort of).
1. It's doing 100% of the work but shifting from getting 80% of the reward to getting 60% of the reward. If you earn say £20 an hour, your last hour in the pre-40% bracket will earn you £16 but that drops to £12 an hour when you jump into 40%.It's quite a different perspective - and mentality - from the PAYEer who gets a payslip and a lump of dosh tax paid in his bank account each month. One has security (sort of) the other has freedom (sort of).
2. Once again, remember who earns what. 15% are self-employed and only 18% pay HIGHER than the basic rate. So you are talking about a tiny minority of people who have that freedom to mow rather than earn.
In my case I'm not self employed - but my personal income is derived from the profits of a limited company I own. Therefore I'll always elect to undertake the work in order to maximise the business's profits, but will then artificially throttle my own drawings from the company to ensure I'm not paying heaps in taxes. I have no problem with paying 40% (or even 46% now with the dividend tax change) but I certainly draw the line before 60% or 70% which is what prompted this aspect of the discussion.
walm said:
2. Once again, remember who earns what. 15% are self-employed and only 18% pay HIGHER than the basic rate. So you are talking about a tiny minority of people who have that freedom to mow rather than earn.
Yes but think inside the numbers... it may be that some of the 82% under the 40% threshold have decided to mow rather than work for 60%. Once your earnings exceed your overheads, then unless you wish to pile it up for the future, the incentive is less. Anyway, my 'Too many percentages' warning light has just come on
walm said:
Simpo Two said:
Once your earnings exceed your overheads, then unless you wish to pile it up for the future, the incentive is less.
A slightly ironic comment in a thread with "pension" in the title!!walm said:
oyster said:
It's 62% at that point. But yes it is another anomaly which acts as a disincentive to work harder.
It's not a disincentive to work harder.That's the whole point of progressive tax rates.
You don't hit the 40% rate say and then decide to stop working or refuse a raise because the tax rate is higher on the extra money.
It is STILL EXTRA MONEY!!!
Sure, diminishing returns and there is a CHANCE that you hit a point where you would rather not work and have more free time but usually more money is still more money, isn't it?
Crumpet said:
Over the years I've neglected my pension and paid very little into it, so I have what I hope isn't an unbelievably stupid question.
For instance (hypothetically): I have savings and assets (that will be sold and currently earn very little interest) that provide a sum large enough to effectively pay myself a salary from the proceeds for 24 months. Eg. Savings and assets equal £48,000, split over 24 months would give me £2000 a month.
Can I then put my entire salary from employment over and above the basic allowance but below the £40,000 annual cap into my pension? Such that I'd pay no income tax and effectively earn 20% to 40% more, albeit with the money being inaccessible and stuck in a pension.
The earnings on the £10,800 basic allowance would then be added to the £2000 a month from savings to give a total monthly 'salary'.
Am I being completely stupid here and missing something, or would this actually work and be benficial? (And also give my pension fund a significant kick up the arse.)
Whether the funds that go into pension come from salary or savings doesn't really make a massive difference tax wise but it may be 'cleaner' for you to use salary. There is a cash flow discussion though.For instance (hypothetically): I have savings and assets (that will be sold and currently earn very little interest) that provide a sum large enough to effectively pay myself a salary from the proceeds for 24 months. Eg. Savings and assets equal £48,000, split over 24 months would give me £2000 a month.
Can I then put my entire salary from employment over and above the basic allowance but below the £40,000 annual cap into my pension? Such that I'd pay no income tax and effectively earn 20% to 40% more, albeit with the money being inaccessible and stuck in a pension.
The earnings on the £10,800 basic allowance would then be added to the £2000 a month from savings to give a total monthly 'salary'.
Am I being completely stupid here and missing something, or would this actually work and be benficial? (And also give my pension fund a significant kick up the arse.)
The important upside in my opinion though is via Salary a Sacrifice - I.e. Do not pay pension via payroll but sacrifice your salary in exchange for a gross employer pension contribution. You can then ask the pension to be uplifted by the employer's NIC - 13.8% uplift on your numbers isn't yo be sniffed at.
This costs the employer no extra but enhances you gross pension contributions. A true win/win
Ps if they agree!
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