Over 100k advice - pension or not?

[BrightLion]

Looking for advice / views from other higher income mums!

I have recently landed a new permanent role (was self employed last year) with a salary of £110k and bonus of likely 20%. This means I will lose tax free childcare and 15 free hours for my daughter who is at nursery 4 days a week. This adds up to nursery costs going up by about £450 a month. I'm a solo parent so no other income coming into the household.

I've done the maths, and between losing the childcare support and the extortionate 65% effective tax rate, my take home pay would only be £3.6k higher than if I was to put everything over 100k (about 23k additional) into my pension.

So, what would you do? Keep all the income and have £3.6k for spending/savings now? Or sacrifice into pension and lose £3.6k this year, but gain £23k for my future self in pension? Either way my monthly budget will be about the same, this would come from bonus at year end.

Also I appreciate I'm fortunate on this salary. I'm self made and have worked really hard to get here, so not looking for commentary on how this is first world problems - I'm aware of that :)

Really helpful thank you!

Absolute no brainer - put it all in pension

Yes exactly, and you pay so much more tax than an equivalent two person household on two salaries adding up to 100k but lose access to benefits sooner. It's really frustrating.

Yes this is tempting, to make sure I get it right!

The pension stuff isn’t quite as straightforward as it first seems - so it’s worth getting the advice to get it right.

It’ll probably seem expensive compared to buying lunch, but compare it to the annual nursery bill and it’ll look like a no brainer.

This is interesting but I don’t understand why it’s better to do one year on one year off. Is it because on the on year you get the benefit of the tax free childcare and 30 hours? Or is there another reason?

@Stringervest I assume it's because of the tax cliffs. When I did the figures a while back it was £100k-£125k that had the highest effective tax rate of about 60% so if you can do £99k one year and £150k next year you average 50% tax on the bit over £100k whereas earning £125k twice you average 60% tax on the bit over £100k.

What is the name (or search term!) for this type of professional? When I had a company, it's the kind of thing an accountant would advise on alongside doing company accounts - but it seems a bit odd to use an accountant when you don't have accounts to file!

The major loss occurs just after the 100k when the tax hits at 60% (loss of personal allowance). After that the tax returns to 45%
If you earn say £165k, you can’t offset everything over £100k and/or if you can’t afford to sacrifice 60k, if you take all the pain 1 year, pay all the tax, then use Carryforward to next year to offset the whole lot and capture all the 60% AND childcare.

So it is better to do £65k once than 30k + 35k as none of the latter payments save 60%, only the 45%, plus neither get you childcare.

The 60% tax trap and loss of chikdcare is an absolute disincentive to work and totally ridiculous.

A Chartered IFA (not SJP or the like), with their tax qualifications would do this.

Chartered Financial Planner

@Spankmeonthebottomwithawomansweekly thank you. There is a lot of terminology in here I don’t understand but I think I can guess what it means. I have always been pretty financially savvy but as I enter this pay bracket it’s clear to me that I have quite a lot of learning to do!

Yes, this is what I do - stay within the 20% tax bracket and don't have to complete self assessment ( contribute through work).

The killer between £100k and £125k is that for every £2 above £100k, you lose £1 of your personal allowance (the £12,570 income you pay no tax on).

So on £100k, you get to keep £ 68,557.40
On £101k, you get to keep £ 68,937.40

For an extra £1000 income, you only get to keep an extra £380. Ie you're paying 62% tax. That's your marginal rate of tax (the rate you pay on each extra £1)

Just below £100k :
On £98k, you get to keep £ 67,397.40
On £99k, you get to keep £ 67,977.40
Ie for that extra £1000 income, you get to keep an extra £580. Ie your marginal tax rate is 42% tax.

Above £125,140, you're past that cliff edge because you've already lost your whole personal allowance So it's back down to 'Additional Rate' tax:
On £127k, you get to keep £ 79,096.40
On £128k, you get to keep £ 79,626.40
Ie for that extra £1000 income, you get to keep an extra £530. Ie your marginal tax rate is 47% tax.

It's just £100k to £125k where you only get to keep 38p in every £1. Combine that with the loss of childcare (£2k per child for tax-free childcare, or up to £10k per child for the free nursery hours) and you can end up with less money if you earn between £100-£125k than than if you earn £99k, which is fairly insane!

So most people in that income range either put the extra in pension or another salary sacrifice scheme, or reduce work.

Once you're earning above about £150k, you probably do want to take some of your >£100k as income. Taking it unevenly means that eg you pay 62% cliff edge rate on £25k and 47% additional rate on the next £25k in one single year... instead of paying 62% cliff edge rate on £25k one year and then 62% cliff edge rate on the next £25k the next year.

@strawberrybubblegumthank you for the explanation. I went down a Reddit rabbit hole last night and now understand about the £60k per year maximum pension contribution and carry forward, which I had never heard of, although tbh it will be a while before I have to worry about that particular problem. My kids are school age now (fair play to all you high earning women with nursery age kids) so I don’t have the 30 hours to worry about but I’d lose around £80pm on the tax free childcare for wraparound care so it’s still worth it for me to keep under the 100k for now.

If you have an emergency fund of 3-6 months in case it would make sense to pay as much into your pension as you can due to the huge tax benefits.

You could pay up to £60k into your pension per year (annual allowance), and enjoy the tax relief on pension contributions. You can carry forward any unused annual allowance from the past three tax years....

Pension!