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Let your next career move come to you.

Assuming an income of 150k, what’s the lowers you think a British tax resident could get their all in rate if income tax down to?

by using tax efficiencies and planning

we are talking about tax on income from the primary economic activity of the individual - you can ignore CGT of any form and you can also ignore VAT and any form of purchase or transaction tax because the question obviously isn’t about those hth

Less than 10%, with planning AND luck.

Essentially you want the excess profit after pension contributions rolling up in a company and then finding reasonable business related assets to invest in to absorb it so you get CGT (@ entrepreneur rate) rather than IT treatment on it when you wind it up or sell it.

 

Do you still get any upfront income tax relief on eis/vct stuff?

Yes but it's a fixed % of the amount invested, so not quite as attractive to high marginal rate payers. 

Also, from bitter experience, don't let the tax tail wag the investment dog. 

Dear Laz,

I note that nothing further has happened on this matter and I therefore trust it is in order to let you have the firm's invoice.

My corporate colleagues tell me that the most recent start-up is Lazcorp (2024) (Number 17) Limited so I have assumed the invoice should be addressed to that company.

Did you ever get someone to help with that cooker ? It was just unfortunate that I was about to leave the country when you called.

Best wishes

your post was actually conceptually helpful and has pointed me in a direction to investigate, as I do not anticipate being a salaryman much longer

thank you!

Tax it at 50 per cent from that threshold. Squeeze the rich and all those who have got richer in Tory England while there are those who are struggling to pay for essentials, who have to choose between hearing or eating.

You don't know how 'the other' lives.

Somewhat more than that. But I don’t really enjoy working hard, so I’m happy to assume a lower income when contracting, for planning purposes.

I say contracting, it would probably be more starting my own firm, in effect

....there are those who are struggling to pay for essentials, who have to choose between hearing or eating.

I made the choice and have ended up as a deaf bloata. HTH.

As discussed before salary sacrifice is completely the wrong thing to do with a pension if you are a higher rate taxpayer, especially if you can SIPP through the £100-120k band. 

If you didn't need any money presumably you could SIPP down to £100k and then dump the rest in a EIS scheme to pay virtually zero tax. You will however pay the scammers that run them 10% and likely lose at least 10% of your capital, but I am sure you will feel smug with it. 

LazLawCo would probably find it convenient to buy the freehold to its offices a couple of years after starting up. You'd have saved up a reasonable deposit already, and the ongoing profits pay down the mortgage fairly quickly. Soaking up profits so hopefully you ultimately pay CGT rather than IT on them. 

bananaman - as someone with some knowledge - can you re-explain the salary sacrifice drawback point? i havent looked at this in detail, but i had thought it was the case, that if you sacrifice from say 140 to 100 you stop the degradation of the annual allowance and that was a good thing. 

"you can ignore CGT of any form"

Can you clarify this? Someone's posted about reinvesting profits in a company and subsequently selling up at CGT rates. Is planning of this type supposed to be ignored?

Also, am I right in saying that you've stridently advocated left wing policies on other threads - presumably with the intention that someone else picks up the bill for them...

Probably because if you take the money then put it in a SIPP you get the higher rate tax back as cash in hand not trapped in the pension wrapper. 

It does mean you're paying national insurance though, which you don't with salary sacrifice. 

Thanks pancakes. I was going to make that point (about the ni). Anecdotally I have heard SS can also pose problems with some mortgage lenders but not seen that in practice 

You save your allowance (noting you can "recover" it for the previous tax 3 years anyway if you have enough cash to pay the present year's annual allowance plus the unused allowance from 3 tax years ago) whether you SIPP or SS. 

With sacrifice all your cash is trapped in your pension. Fine if you are happy to lock it away and trust no jiggery pokery with the lifetime allowance ever again. However, if you SIPP you get the higher rate relief back as cash through your tax return. You can then blow this on hookers and blow, or put it into any other form of tax efficient investment to basically "double-dip" on allowances for the cash. For example, I am on £150k. My employer will do the standard 5% match. So I salary sacrifice down to £135k. 

I sell a watch for £35k, aiming to get through the 60% marginal rate from £100k to 120k. I make a payment of £28k into my SIPP. I'll then get £12,521 of that back via my tax return as the higher rate relief. I'll stick £4k of it in a lifetime ISA, immediately bumped up to £5k by the govt, and the remaining £8,521 into my remaining £16k ISA allowance to shield it from tax. That £13,521 will then be completely shielded from tax, whereas if I had sacrificed down to £100k all of that higher rate relief would be taxed on drawdown from my pension and trapped in there.

 

 

As to NI, in the example above the person has forgone £700 in employee's NI. Likely easily covered by the tax they pay on extraction of money from their pension fund, and a "price" of having that £12,521 in your hands "tax" (not NI) free. Might get more interesting if the employer put the £5k of employers NI they save into your pension fund as part of salary sacrifice, but as far as I know there is no employer that does this (though some law firms will go beyond a matched contribution e.g. offer 8% for a 5% contribution). 

@bananaman - presumably the relative merits of employer vs employee additional pension contribution are different if you also care about the employer NI ? I haven't got my head round which would be better strategy in above scenario if I own the employer.

I agree but the point is you don't have to trust them - they have given you £12,521 tax free. 

I also think all this is short lived as at some point £40bn from pension higher rate tax relief is too attractive. 

The watch sale thing lost me.  Perhaps i am not clever enough to follow what you are saying.  

25% of that higher rate relief would be tax free though when drawndown?

 

i get the rofishness of watch selling  - but the money just appears? (ie is not income - so presumably taxed already). 

Keeping it simple, if you earn say 150k and sacrifice 50k and get the employer to pay you their saved NI contributions, then you pay no tax at the moment but obviously you pay tax at your marginal rate on drawing your pension (subject to the 25% rax free allowance). 

In the same scenario, how is SIPP investing post paye better?  You pay the NI (and the employer pays the NI on the larger earned amount)?

"The 150k is income from doing work. It does not have to be structured as salary."

So it's your own business (which you could operate as a company and draw salary from, but don't have to) - right?

Are you going to employ anyone else or will this just be one man band consultancy for the next 10 years?

 

You need cash to make the SIPP contribution. Doesn't matter where it comes from as long as the SIPP contribution doesn't exceed your salary. So assuming you are down to £135k taxed income, you can use the circa £80k net left over to make the £28k contribution. 

If everything stays the same, then there should be minimal difference between salary sacrifice and SIPPing from the employee's perspective if your goal is to have the same pension pot.  You will have slightly more in your pension through the saved employee NI with salary sacrifice. I am assuming here that you take the tax rebate through your self-assessment form and put it straight back into your pension fund. 

If you could get your employer to put their entire employer NI saving into your pension fund (I would think this is highly unlikely for most), then you would be better off than SIPPing (again assuming all tax relief gets put into your fund).

The point is, if you are one of the vast majority of employees who don't see any employer NI saving and don't have ownership of the business to see the employer NI saving, SIPPing gives you the higher rate tax relief in hand today, not stuck in your pension fund subject to the vagaries of government policy. 

Your employer would love it if you salary sacrificed down from £150k to £100k, as they will put £7k of employer's NI back in their pocket. 

 

@ bananaman I agree with your point but the stuff about watches and hookers is pretty confusing.

Can I put it like this - assume 100 of income and a 40% tax rate, forget about NICs for now.

(i) Sal sac - no tax on this and 100 is trapped in the pension scheme.

(ii) SIPP - contribute the net 60, pension scheme claims 20 so there is 80 in the pension scheme. You are paid the 20 by HMRC making up the same 100.

The tax saving of (ii) over (i) is that you can access the 20 tax free whereas there is income tax on drawdown of that 20 from the pension, subject to the 25% tax free. In addition, if you can put this 20 into an ISA you can replicate the tax free treatment on investment returns that you get in a pension, but without the downside of tax on the initial investment on the way out.

The caveats are: (i) do you have headroom within your ISA to get tax free treatment on the investment returns on the 20, and (ii) you suffer an up front employee NICs cost to get this treatment (sensible to assume that an employee can't share in any employer's NICs saving).

I meant 60 not 60,000 - just an example with a round number of 100.

Not an expert and shooting from the hip here but I think the annual allowance would be another point in support of what bananaman is saying.

With option (i) the 100 sacrificed into the scheme would count towards the annual allowance. With option (ii) the amount going into the scheme (60 plus the 20 the scheme claims from HMRC) is 80 - I expect only 80 will count towards the annual allowance. 

So on a like for like comparison option (ii) will give you more headroom within the 60k annual allowance.

This should be easily google-able if anyone wants to check.

Of course, FAOD all of this assumes that you are a salaryman and that your employer will pocket any employer NI saving on a sal sac. So it isn't actually a valid answer to the OP if I've understood his situation correctly.

The limit is 60 whatever you do. Salary sacrifice £60k gets taken off your pay and goes into your pension "untouched". 

SIPP (assuming max contribution) you pay your SIPP provider £48k (whether out of net income or from savings). They collect £12k basic rate relief from the govt. You get the higher rate relief back via a claim in your tax return i.e. part of that £48k back. You have to find the money in the interim - hence the need to have a watch on hand or accept a lean period between making the contribution and getting the money back. The point is once you have filed your tax return and got your rebate:

Salary sacrifice  - 100% in pension fund

SIPP - majority in your pension fund, significant minority in your pocket tax free. 

Also prob worth pointing out even if you don't have an ISA you can put the tax free SIPP cash in an ordinary investment account in accumulation units or a growth stock and then sell and rebuy periodically to use your CGT allowance. 

Obs could also gift the money to a lower earning spouse to invest/SIPP. Also can put £3,600ish into a child's/non-earning person's SIPP so that they basically don't have to think about pensions, or a lifetime ISA for them once they are 18 that can be used for a first time house purchase. 

Also note a SIPP is a v efficient IHT planning tool so could make sense to set one up for a spouse even if intention is to only drawdown on your one. If the spouse dies before 75 without drawing down 100% goes to beneficiaries tax free, and if they make it past 75 only taxed at recipients' marginal rates. 

I've found this book quite useful: Pension Magic it explains salary sacrifice with some good examples (or at least the edition I have does).  It's worth checking if your SIPP provider will accept the payment from your employer rather than from you as an employee.  

Being picky, I don't think £60k sal sac vs £48k into a SIPP is a like for like comparison.

Assuming a 40% tax rate, a better comparison IMHO would be £36k net from the £60k gross pay goes into the SIPP, SIPP picks up £12k from HMRC and you pick up a further £12k from HMRC. No need to flog any watches.

End point is £48k in a pension scheme and £12k in your pocket which should be better than £60k in the pension scheme if you can get a tax free return on the £12k.

However, you lose say £1,200 (£60k * 2% EE NICs).

do both of these options preserve the annual tax free allowance that gets eroded between 100 and 125k making the marginal rate 60%? As that was the starting point. I had thought that this could only be achieved by SS and not by contribution out of income paid - is that wrong?

Use listentotaxman to work out the NICS. Use the HL pension calculator to work out your tax back through SA. I can’t be arsed with nitpicking - the basic notion is the same. SIPP higher rate relief cash in hand, SS stuck in your pension fund. 

Yes SIPP your adjusted income or whatever it is called drops to the post-SIPP contribution level. There is no difference apart from the minor employee NI one.

If the max tax reclaim is 40% via SIPP/tax return, but you're earning, say, £125k with a marginal rate of tax of 60%. Isn't it better to salary sacrifice as you're effectively saving tax at a rate of 60% on that tranche? i.e. if you SIPP it, you won't get that extra layer of basic rate tax back. And as others have said, nor the employees NI at 2%, nor the employers NI at 13.8% (if they give it to you, which my place does).  So the return you make on the £12k that you could have kept outside of the SIPP needs to out-run all those opportunity costs before it would make more sense (ignoring tax on drawdown in the fullness of time, which can be minimised).

"if you SIPP it, you won't get that extra layer of basic rate tax back"

What's the basis for this? Isn't a SIPP contribution deductible, which should take your total income down?

"to simplify, assume I don’t employ anyone"

To answer the OP, unfortunately I don't think there is a silver bullet here. 

Pension contributions have been mentioned but even on Bananaman's version that is tying up a significant amount in a pension pot. It's not giving you money in your pocket at a lower tax rate.

Eeyore's proposal (roll up profits in a company and liquidate later at 10%) also ties up funds for years and years. You would really only be able to get the money out on retirement.

If you can afford the hit to cashflow it would be worth keeping your total income below £100k with pension contributions or by other means, including possibly rolling up within a company. However, getting from 150k all the way down to 100k is clearly a meaningful hit to your net pay.

There are other things you can do to play around the edges e.g. if you are interested in an EV I expect this could be done in a tax-efficient way.

 

 

Btw I'm also assuming that, if you're married, your spouse is a high earner. If you have a low or not earning spouse there might be a few angles there too.

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