Marginal tax rates

[JapanRed]

I have seen people discussing marginal tax rates multiple times on this forum and others. And that people can actually end up paying in excess of 45% tax in some cases. On a Doctors forum someone was saying that they pay in excess of 100% tax if they do overtime.

Can someone tell me how this is worked out, with an example or two if possible?

I'm worried I may fall into the same category as I earn similar to some of the people saying they pay over 45% but earn under £150k.

Thanks in advance.

[Squiddly Diddly]

Possibly adding in the excess pension contribution tax charge?

[bogie]

You start to lose tax relief/allowances at certain break points:

>£100k gross earnings and you lose your £11k tax free allowance that every worker gets, so you pay 40% tax on another £11k giving you effective tax rate >60% between £100 and £110k

>£150k of earnings and you are at 45% income tax rate, then you start to lose the tax relief you could have been getting on your pension contributions, by £210k you can only get relief on £10k instead of £40k per year of pension contributions. So if you already paid in say £40k to your pension out of earnings of £150k, then you get a bonus of £60k they claw back the relief you had on first £30k pension contribution (£12K) plus 45% tax on the £60k (£27k tax) .....so that £60k bonus becomes £21k in your pocket...you basically pay 65% tax on that extra £60k bonus

...and dont forget about National Insurance.....

[Dixy]

And this is why Consultant Surgeons don't work extra clinics and why there are long waiting lists. The law of unforeseen consequences.

[bogie]

Also why groups of consultants set themselves up as Limited Companies, with central admin staff as its more tax efficient than being a highly paid PAYE employee....

[Mr Pointy]

Dixy said:

And this is why Consultant Surgeons don't work extra clinics and why there are long waiting lists. The law of unforeseen consequences.

They could always cut their hourly rate of course & then they could see more patients.

[JapanRed]

Many thanks Bogie that's very well explained.

I'm deducting from your explanation that there is no risk of me or my wife paying excessive marginal tax so long as we both stay below £100k?

If I earn £60k PAYE and £40k dividends and she earns £30k PAYE and £70k dividends we would be alright (other than having to pay back child tax credits/benefits)?

Thanks again.

[bogie]

Yeah thats a good way to do it if you have a LTD company.

[jonttt]

Don’t forget benefits in kind also found as income is working out you tax banding / loss of alliances eg if you are on a £100k salary but have a car with a BIK of £10k per annum then you lose half of your personal allowance so the effective tax on the car is higher than it would be normally ;-) is lots of people fail to realize that when they are around the tax bindings ;-)

[djc206]

bogie said:

You start to lose tax relief/allowances at certain break points:

>£100k gross earnings and you lose your £11k tax free allowance that every worker gets, so you pay 40% tax on another £11k giving you effective tax rate >60% between £100 and £110k

Not quite right.

It’s your adjusted net income that matters not simply gross pay.

Then every £2 you earn over £100k you lose £1 of personal allowance which last year for a normal working person would be £11850. So if you earned £123700 or above you’d have no personal allowance left. Any money earned between £100k and £123700 was effectively taxed at 60%.

This coming tax year the PA is going up to £12500 so the magic number is going up to £125k.

[Countdown]

Squiddly Diddly said:

Possibly adding in the excess pension contribution tax charge?

Yes. For NHS Consultants that happens because of they are in a Final salary defined benefit pension scheme, so for every additional year of accrual the increase in their CETV results in the tax charge (which they CAN actually defer and pay later).

[foiled]

djc206 said:

Not quite right.

It’s your adjusted net income that matters not simply gross pay.

Then every £2 you earn over £100k you lose £1 of personal allowance which last year for a normal working person would be £11850. So if you earned £123700 or above you’d have no personal allowance left. Any money earned between £100k and £123700 was effectively taxed at 60%.

This coming tax year the PA is going up to £12500 so the magic number is going up to £125k.

Is threshold income the same as net income?

[JapanRed]

Thanks everyone. Very helpful.

[supersport]

bogie said:

You start to lose tax relief/allowances at certain break points:

>£100k gross earnings and you lose your £11k tax free allowance that every worker gets, so you pay 40% tax on another £11k giving you effective tax rate >60% between £100 and £110k


...and dont forget about National Insurance.....

Other than the tapering which others have mentioned, aren’t you actually paying 20% on the basic personal allowance and not 40%?

[bogie]

supersport said:

bogie said:

You start to lose tax relief/allowances at certain break points:

>£100k gross earnings and you lose your £11k tax free allowance that every worker gets, so you pay 40% tax on another £11k giving you effective tax rate >60% between £100 and £110k


...and dont forget about National Insurance.....

Other than the tapering which others have mentioned, aren’t you actually paying 20% on the basic personal allowance and not 40%?

Depends on your existing tax code, you pay 20% tax on the first £46k of earnings, but many people earning >£100k have a range of benefits like cars, life insurance, health, fuel, etc which all reduce your tax code. You may have a negative code already and then lose the personal allowance. I was in this situation for many years when on PAYE.

Use a calculator like this and your real tax code to see the effect https://listentotaxman.com/

[gangzoom]

JapanRed said:

Many thanks Bogie that's very well explained.

I'm deducting from your explanation that there is no risk of me or my wife paying excessive marginal tax so long as we both stay below £100k?

I think thats the path we are going down. 100K a year per tax is roughly £5k a month net depending on pensions, if x2 of you thats £10k a month net.

The average UK household income is substantially less than that. Unless your living like a king (and sending the brood to private school) I can see little financial incentive to work harder. Personally am quite happy with the work life balance at the £100k mark.

[p1doc]

Mr Pointy said:

They could always cut their hourly rate of course & then they could see more patients.

would you work for less at weekends instead of spending time with your family?

[JulianPH]

Factor in employee and employer NI contributions and everyone paying the basic rate of tax is effectively generating the Treasury 45.8% of their earnings.

[gangzoom]

JulianPH said:

Factor in employee and employer NI contributions and everyone paying the basic rate of tax is effectively generating the Treasury 45.8% of their earnings.

Add in VAT, all other 'mandatory' taxes like insurance/airport, and even at the end with inheritance tax, that figure is probably over 60%.

Tax and death, only two guaranteed outcomes in life .