The tax tail wagging the dog

[triplecrownjockey]

I would be a higher rate taxpayer if not for the fact that I salary sacrifice everything I earn over £50k. Over the years, this has been great for my pension, and it’s kept my lifestyle inflation in check, but with actual inflation rising, I’m technically getting poorer every year.

I’m starting to feel that it would be nice to earn more than £50k, as it would undoubtedly accelerate a few short/medium-term goals and luxuries, which would be much easier to justify when grossing an additional £40k each year. This would reduce my contributions to 5%, plus 5% from my employer.

The difficulty I’m having is that I’ve punched the numbers into a salary calculator, and the tax penalties are horrific.

The money I could be putting in my pension (plus NI contributions on everything I sacrifice) to claim 25% tax-free later, and the rest at 20% tax, is being decimated by a horrific 40% tax and then 2% NI.

This is proving to be a real mental blocker for me; I know this is purely psychology because I may not even make it to pensionable age.

I suspect I’m not the first person to have this difficulty. I’d be interested to know how you rationalised your thoughts to accept paying more tax or whatever your conclusion was.

[sociopath]

I just accepted that paying tax was the right thing to do, and if I earned more then I paid more.


It also meant I could enjoy my money and not scrimp and be miserable just to prove a point

[Muzzer79]

That's some hardcore dedication to sacrifice nearly half of your salary to keep under the 40% threshold.

For me, I look at tax as unavoidable if one wants to fund anything like a reasonable lifestyle. There is also the fact that I don't have any choice - I could only live like Tom and Barbara if I did what you're doing.

For me, it's keeping one's personal allowance that's key. That; I do everything to ensure.

[okgo]

Its 8% difference in taxation from £49k to £90k from a quick look. Hardly worth worrying about is it?

Wait till you get above £100k, then you've got a reason to moan.

[triplecrownjockey]

sociopath said:

I just accepted that paying tax was the right thing to do, and if I earned more then I paid more.


It also meant I could enjoy my money and not scrimp and be miserable just to prove a point

Something I didn't add in my original post was the opportunity cost.

Doing what I'm doing will allow me to retire with a multi-million-pound pension pot, which excites me.

The alternative is I take the cash now, which will make it much easier to buy a 599, but the opportunity cost + running costs will leave me a lot worse off in the future.

[triplecrownjockey]

Muzzer79 said:

That's some hardcore dedication to sacrifice nearly half of your salary to keep under the 40% threshold.

For me, I look at tax as unavoidable if one wants to fund anything like a reasonable lifestyle. There is also the fact that I don't have any choice - I could only live like Tom and Barbara if I did what you're doing.

For me, it's keeping one's personal allowance that's key. That; I do everything to ensure.

Pretty sure HR thinks I'm mad, as they always seem shocked when I ask them to salary sacrifice my bonus or get a new pay rise.

Thanks for your point of view.

[vulture1]

You have to remember to live now.

I bought a noble at 24 just after the financial crash and had an amazing 4 years with it. Had I put that money into stocks at the time I'd probably not need to work just now but those memories of blasting down alpine passes racing a lamborghini gallardo or the track day at monza will live with me forever.

[Muzzer79]

triplecrownjockey said:

sociopath said:

I just accepted that paying tax was the right thing to do, and if I earned more then I paid more.


It also meant I could enjoy my money and not scrimp and be miserable just to prove a point

Something I didn't add in my original post was the opportunity cost.

Doing what I'm doing will allow me to retire with a multi-million-pound pension pot, which excites me.

The alternative is I take the cash now, which will make it much easier to buy a 599, but the opportunity cost + running costs will leave me a lot worse off in the future.

1. Who knows how much a 599 will be when you retire? You don't say how old you are.

2. My grandfather worked on the railways for 45 years - man and boy. He saved frugally, adding to his pension pot so he could retire at 60 and enjoy a quieter life, away from shift work, with my grandmother.
They had plans to travel the UK, research their family tree, he loved gardening and his allotment.

He duly retired at 60......and died 7 months later of cancer.

I'm all for saving for the future and I have no intention of working a day longer than I have to. However, it's important to balance the fact that life is also for living now - it's no good being the richest guy in the graveyard and all that.

[Freakuk]

Tax is a necessary evil to fund my toys and lifestyle. You're a long time dead as they say and I wouldn't want to be in my 70's surrounded by a mountain of cash wishing I'd have done something, bought something when I would have had the fitness/health to enjoy it.

[Scootersp]

triplecrownjockey said:

The alternative is I take the cash now, which will make it much easier to buy a 599, but the opportunity cost + running costs will leave me a lot worse off in the future.

Remember the future is always reducing and we are degrading as it does!

You sound like you've been very dedicated to the tax swerving so far and doing this early will have paid dividends for your pension already. You can always do more and sweat over the size of a pot, but it sounds like you've alreay made a great provision and you have to spend it at some point and sounds like spending some now wouldn't hurt.

Just be a bit frivalous for a year or so, you can always go back to the current way if you don't enjoy it!

[Olivera]

triplecrownjockey said:

Something I didn't add in my original post was the opportunity cost.

Doing what I'm doing will allow me to retire with a multi-million-pound pension pot, which excites me.

The alternative is I take the cash now, which will make it much easier to buy a 599, but the opportunity cost + running costs will leave me a lot worse off in the future.

If you have a multi-million pound pension pot then you'll previously have been paying tax on the way in (above the lifetime allowance), and will be paying substantial tax on the way out. Furthermore restricting yourself to 40k per annum for a windfall on retirement is, IMO, extremely foolish.

[Sy1441]

No guarantees you'll live to pension age.

[alscar]

It’s all about a balance.
Brilliant about receiving a large pension but thats a way off.
There are also other methods of investment.
You can also invest and recover some or indeed all income tax paid ( up to a limit ) by using VCT, EIS , SEIS and KI EIS type investments.

[MaxFromage]

Given people are talking about making it to pension age, bear in mind a private defined contribution pension can be taken at 55, rising to 57. Also the IHT/death position on these type of pensions is pretty good at the moment, so there are lots of positives in putting chunks of cash into one.

A surprising amount of people sacrifice significant salary and depending on their specific financial circumstances, it can knock years off retirement age for not a lot of downside.

[MaxFromage]

okgo said:

Its 8% difference in taxation from £49k to £90k from a quick look. Hardly worth worrying about is it?

Wait till you get above £100k, then you've got a reason to moan.

It often used when people will lose their child benefit due to breaching the £50K threshold. That adds another 10% relief.

[okgo]

MaxFromage said:

It often used when people will lose their child benefit due to breaching the £50K threshold. That adds another 10% relief.

He’s talking about buying a Ferrari on £90k a year. I assume he is without child

[z4RRSchris]

serious dedication fair play.

50k doesnt even cover my butlers rent

[sam.rog]

You could be dead tomorrow.
I doubt anyone on their deathbed wished for more money.

[JagYouAre]

Muzzer79 said:

1. Who knows how much a 599 will be when you retire? You don't say how old you are.

2. My grandfather worked on the railways for 45 years - man and boy. He saved frugally, adding to his pension pot so he could retire at 60 and enjoy a quieter life, away from shift work, with my grandmother.
They had plans to travel the UK, research their family tree, he loved gardening and his allotment.

He duly retired at 60......and died 7 months later of cancer.

I'm all for saving for the future and I have no intention of working a day longer than I have to. However, it's important to balance the fact that life is also for living now - it's no good being the richest guy in the graveyard and all that.

I think this is great advice. Put away enough to ensure a comfortable (even more than comfortable) retirement but don't do it at the expense of living a comfortable and enjoyable life now.

You never know when your time is up.

Someone mentioned earlier but the total effective tax rate only goes up from about 23% at £50k to 31% at 90k. It's shortly after that where it escalates pretty quickly to nearly 40% by the time you are around £120k.

[okgo]

sam.rog said:

You could be dead tomorrow.
I doubt anyone on their deathbed wished for more money.

But you probably will live until your 80’s like most people.

Do you want to die because you can’t afford to eat or heat your house?