£100k penalty

[fiskalina]

I'm nearly earning £100k and I think pay rise this year will put me above it. I've read a lot about how you're worse off at £100k but I'm unclear if this is still true
if you have no childcare costs.

Is it still worth putting more into pension to keep below £100k?

Yes because the marginal rate of tax when you earn between £100k and £125k is about 62% due to losing your personal allowance

There are some people who are actually worse off earning a little over £100k than a little below. That's because of the high marginal tax rate + loss of childcare support.

If you don't have any childcare costs then you will still be finanically better off by earning above £100k but at the PP says, the extra earnings will be at a very high marginal tax rate of 62% (for tax, plus loss of personal allowance plus NI) between £100k and £125k. The difference in your take home may be even lower e.g. if you have student loan repayments or pension payments. For that reason many people at this level either reduce their hours (so they gain in time rather than money) or put everything over £100k into a pension. Of course you still pay tax on the way out of the pension but if you save 60/62% (depending on whether you are salary sacrificing) tax on the way in and pay 20% on the way out then that is a significant saving.

Thank you, both.

Do I just need to bring it down to £99k? I can up my pension contributions.

You only need to bring it under £100k if you are going to lose your free hours of childcare.

You can bring your earnings down to 100k. After that as someone said you will
Pay 60% tax and 2% NIC on all earnings between 100&125k.
More if you live in Scotland.

You will only be getting taxed on the amount over £99000 so will still be gaining surely? X

Look into salary sacrifice. Your employer ups their pension contributions for you instead of increasing your salary. They save NI and you save tax and NI

Good article on this in the Telegraph yesterday quoting people who are salary sacrificing and/or dropping days to get under the £100k. It's madness, hopefully this will be fixed by whoever gets in next time. In the meantime highly qualified people are taxed to within an inch of their lives 😟

If they can salary sacrifice anything over £100k into their pension it’s an effective 60% tax saving so a huge incentive to do so.

And that’s without childcare.

DH has just changed jobs (left CS for private sector) partly because of this - and he wasn't allowed to pay more into his pension/get salary sacrifice. But I still don't understand it - can someone explain how it works/post a link to a good explanation?

did he take financial advice?

i am CS and while we can’t up pension/salary sacrifice we have a separate “AVC” additional voluntary contributions scheme. I have signed up about a year ago and it’s very good.

even if he can’t make additional contributions through work, there’s absolutely nothing stopping him opening a SIPP and contributing into that. Slightly more work as you need to submit a tax return to inform HMRC but it’s not onerous.

nearly everyone in our dept earning over 50k uses one of these methods to reduce tax burden, or to keep CM, or both.

That’s not correct. It’s because you start to lose your personal allowance.

For evert £2 you earn over £100k you start losing £1 of your personal allowance.
So effectively paying a lot more tax. At £125,140 you have lost all your £12.5k allowance.
By putting anything over in your pension you keep your allowance. Salary sacrifice is the best way.

Oh what a dilemma to face!

It is a dilemma, if they didn’t have such ridiculous high marginal tax rates then people wouldn’t need to plan like this. The loss of personal allowance when you go about 100k actively encourages people to cut hours and/or put more into pensions. Removal of the cliff edge could actual increase the tax take.

If you're not using child care then it doesn't matter if you go about £100k (you won't suddenly lose money that you would have had at £99k) it's just that you will see little benefit for each additiona £1 you earn. Most people find it's not worth taking that as take home pay so they either work less now by cutting hours or plan to work less in the future by sticking it in a pension.

I think that for childcare it's adjusted net income that matters - see https://www.gov.uk/tax-free-childcare

Not sure about the personal allowance

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@Runningbird43 - it was his bonus that created the issue. It brought him into that £100k- £125k band and the majority of it was taxed away, and he wasn't able to choose to put it into an AVC or SIPP. It's hard to earn a decent bonus in the CS these days, so it was pretty demoralising. The new job's basic is 40% higher than his previous job, and the bonus is bigger although obviously not guaranteed, so there are good reasons to move. And he has opened a SIPP and is taking tax advice.

There's always one. People having vastly different circumstances is a fact of life

It is okay to ask advice in these matters to be as efficient as possible with tax and income affairs ; why do these thread always attract some sarcastic comments ; it is these high earners pay highest tax that benefits the Lower earners and they don’t deserve such sarcasm surely 😞

it is these high earners pay highest tax that benefits the Lower earners and they don’t deserve such sarcasm surely

Quite. The average public spending per person is £12,227 in England (slightly higher in Scotland, Wales & NI).

If you earn less than £55k per annum, and have the usual tax code 1257L, you pay less in tax than the government spends on you, even less if you have dependents.
Someone on £100k pays £31.5k in tax, more than twice than the public spending they 'receive'.

No good deed goes unpunished. People hate high earners even though 10% of UK taxpayers pay 60% of the income tax. Not sure if the country would be better off if they switched to benefits.

It’s not that you receive less money in your pocket if you go over 100k, it’s that for every £1 you go over you get less than 40% of it in your pocket. (That’s without the childcare issue on top) So for many people they have to think if it’s worth the extra time and responsibility and stress for a marginally low gain! Putting that extra money into your pension is a good option that means you get that money for the future and aren’t paying all that tax on it.

The system is not well thought out and I agree that it discourages high earners and probably causes an overall tax take reduction.

There is absolutely no rule barring civil servants from opening a private SIPP, paying into and completing the appropriate self assessments.