Two satisfying tax breaks for high earners
If you earn over £100,000 you'll find your personal allowance disappears. But there is a way of clawing it back, says Merryn Somerset Webb.
Let's say you earn over £100,000 a year. You probably feel mildly irritated by the removal of your personal income tax allowance. It used to be that everyone had a universal right to earn seven grand or so without paying tax. No more. Today the allowance currently £7,475 is no longer a right granted to those the state considers to be high earners. Make more than £100,000 and it is progressively withdrawn for every £2 you earn you lose £1 of the allowance until, at £114,950, it is all gone, giving you a marginal tax rate of 60% and making you wonder if getting up so early is really worthwhile after all.
You will be pleased to hear then that there is a way to claw something back. How? Via the pension system. Richard Evans, writing in The Daily Telegraph and using figures from Vince Smith-Hughes of Prudential, uses the example of someone earning £114,950 a year. He makes a pension contribution of £14,950. This brings his taxable income down to £100,000. So he gets his personal allowance back, saving him £2,990 in tax. Then he gets his 40% tax back on the contribution, adding another £5,980. That means he has bumped up his pension by nearly £15,000 for a total cost of less than £6,000.
But it doesn't end there. If he's over 55, he can also take 25% of his pension pot out in a tax-free lump sum. That would mean immediately withdrawing £3,737, leaving a pension contribution of £11,213 behind. Add the £3,737 to the tax savings made and the net result is that the saver in question has paid a mere £2,243 for the £11,213 of pension. Very satisfying.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Anyone earning up to £150,000 can use this trick to get their personal allowance back (assuming they're prepared to lock most of the money into a pension). It won't work for those on more than £150,000 because pension contributions are now capped at £50,000 a year. But high earners can earn between £150,000 and £200,000 and avoid the 50% tax rate should they want to. Earn £180,000 and put £30,000 into a pension and you won't be bothered by the 50% rate at all unless your income is still over £150,000 when you retire.
For over-55s on very high incomes, there is still something clever to do. Let's say you pay £50,000 to your pension at age 55 when you are still earning £200,000. Add back the tax relief and your net cost is £25,000. Then take out 25% (£12,500). The net cost of the contribution is now £12,500, but you have an extra £37,500 in your pension. Also satisfying. Still, don't think the Lib Dems haven't noticed these loopholes. If you want to use them, do it soon.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
-
Best funds to add to your ISA or SIPP before the Budget
With Labour expected to increase taxes, ISAs and SIPPs could be a great way to protect yourself from any CGT hikes. We look at the best funds to buy now
By Katie Williams Published
-
Starling Bank slapped with £29 million fine over ‘shockingly lax’ financial crime controls
The Financial Conduct Authority has fined Starling Bank £29 million over failings related to financial crime and its financial sanctions screenings
By Kalpana Fitzpatrick Published