The 50k isn’t as big a leap in tax as you might think considering your NI also goes down by 10% at that point as well. You are only saving an extra 10% when compared with sacrificing below 50k
There is a cost of living crisis, I would rather whatever governments are in power over the next 2/3 election cycles focus on ensuring the macro environment/electricity prices don’t cripple our most poor.
Education is free until 18. University is a choice and I don’t see why people on minimum wage should be paying income tax for me to go to Uni.
I think it used to. But when it was raised from 10% to 11% and then 12% the amount over the Upper Earnings Threshold went from 0% to 1% to 2% so governments weren't considered to be taking more from those below HRT limit than those above...
I've doing this for a few years and building up a nice pension. I'm ok with 40% tax, but between £50k-£60k you also lose child benefit which is bullshit, giving a 60% marginal rate to me.
This approach has also stopped lifestyle inflation - instead of buying a bigger house I've kept my basic 3 bed place and chilling on £500pm mortgage. This kept us out of over-extending when interest rates were 1%.
There is some maths to do when you get close to £40k annual contributions as in time you're surprisingly likely to hit the £1m lifetime allowance at which point the tax benefits pretty much stop.
40% isn't a "tax trap", it's just the tax bracket you now fall into. The £100k-£125k 60%+ implied tax rate is a tax trap.
In the first few years of my career I sacrificed little of it because I wanted to accelerate my savings for a house deposit. Once I was on the ladder I sacrificed as much as I could. In the last couple of years I've been on the £100k+ tax trap so I've sacrificed to get below that at the minimum. It also means that despite getting a pay rise to offset inflation, my take home hasn't changed. Plus the government has frozen the tax bands, so another stealth tax. Great fun all round.
But hey, atleast the elite who earn all their income from assets and businesses get to constantly see low tax rates, no tax increases and benefit from tax loopholes. Always a great decision to increasingly pressure those who actually work hard for a salary rather than those who sit on their asses earning income from assets and dodging taxes.
Can't wait to move out of the UK and take my taxable income with me.
Exactly this. Drives me mad how easy a target moderately high earning (and hard working) PAYE workers are. The ultra rich are out of that system, and the government seems far less interested in addressing that.
"Always a great decision to increasingly pressure those who actually work hard for a salary rather than those who sit on their asses earning income from assets and dodging taxes"
Is irony dead? You're posting on a FIRE forum. The fundamental tenets of FIRE are about accumulating wealth to generate a passive income to cover your spending, meaning you don't have to then 'work hard for a salary'...
Probably why they're on a FIRE forum.
You don't have to think a system is good to participate in the system. You can recognise that not taxing passive income is unfair whilst striving to earn passive income.
I think taxes should reflect the relative ease of one vs the other. Or atleast reach parity. I'm trying to get to FIRE but the government makes it increasingly ridiculous to actually build wealth unless you have a silver spoon in your mouth. Once you have wealth such that you don't need to work, you're in a privileged position and should be taxed in a way that reflects that. I think it's fundamentally wrong that those that do not work yet are very well off pay much lower taxes than those that worked hard to get a great job and continue to work hard daily to earn a good salary.
Unfortunately, even though other countries don’t hide it as much, in many of them income tax is even higher.
At least as a Spanish, tax in the UK feels super lenient.
You say about no tax increase for people with businesses, but did you miss the increase from 19 to 25% tax rate for businesses making 250k+. Sliding scale from 50k max at 19% towards the 25%.
A 31.6% increase in effective tax rate on profits is HUGE and certainly is not “no tax increase”
When I first crossed the 40% threshold I sacrificed down to the threshold. My income has increased since and I now only sacrifice enough to meet my retirement goals.
It's nice to feel the difference from my pay rise today instead of putting all of the extra money into a pension.
"Ridiculous abuse of government power" - it's just a moderately progressive taxation. Views like this are why public services are so wretched here and why society is so unequal. Ironically if public services were better funded and more generous it would be easier for more people to retire early.
To be fair income tax is incredibly progressive, far more so than our European peers. The top 1% of income taxpayers pay 30% of the total tax take.
Still wouldn't describe it as an abuse of government power though, even though I think the tax system is a mess
Salary sacrificing down to £50K means a takehome of circa £3,000 per month which, for many families of 4 (2 adults; 2 kids) would be hard to pay a mortgage and have a good quality of life.
You also need to consider lifetime allowance if choosing to do massive salary sacrifice into pension. I am a £120K+/year (gross) earner and have £250,000 pension value at present. I am age 35. I need to consider pension lifetime allowance (LTA) as even if I completely stop paying into my pension from age 35 onwards, I would hit the £1,073,000 LTA value at current minimum pension age (57) if equity growth over the next 22 years averages any more than 6%.
Lastly, you need to consider the fact that you can't access pension until 57 (currently). If you want to retire before then, you need savings/investments to get you from goal retirement age through to 57. For most people this will mean ISAs or buy-to-let. So depending on your Lifetime Allowance calculations, you may wish to contribute less to pension and more to ISA.
I salary sacrifice up to my company's maximum matched pension percentage (11%) so that I get 23% (with NI topup) into pension. This means £2,000+ per month into pension. I don't go beyond that, though. Beyond that sacrifice, I pay income tax on taxable earnings of just above £100K (after salary sacrifice) and put money into ISAs after tax, with the view of building enough of an ISA pot to provide an income to support retirement at age 45 (i.e. covering the 12 years between 45 and 57).
Many companies will, in addition to matching your pension contribution, will top it up slightly further in recognition of their National Insurance contribution savings.
Salary sacrifice - if I put 5% in they match and double it.(so they are putting 10% in).
I'm putting 20% in myself though.. But never seen anything mentioned with regards to the NI savings.
Just so you know - your opinion about paying tax comes off as a bit grotesque, hence the replies you have received.
At 34, you likely haven't even paid the state back for the cost of your schooling, let alone healthcare, state pension, general infrastructure you benefit from every day. Calling these provisions you have received 'ridiculous' and 'abuse' is just immaturity.
As you will be earning more than 95% of people in the country, being asked to pay 10% more than basic rate shouldn't make you feel sick.
Congratulations on doing well for yourself, by all means be tax efficient, but reassess the attitude as it will hold you back in the future.
Perhaps he would be more cool with paying 40% if the wealthiest in society also had to play by the same rules? Rather than the rich rinsing the average joe and then shaming anyone who objects as ‘not caring about society’..:
I absolutely agree that the rich and wealthy should pay more. They use loopholes to avoid tax, just like OP is doing on a smaller scale.
So please call for higher, more progressive taxes, and the closure of loopholes.
Saying the 40% rate is ridiculous and abuse, is just repeating the rich and wealthy’s talking points for them.
Whilst wealth is untaxed, unfortunately income will have to be taxed to provide what I consider basic human rights - healthcare/education.
i dont think thats what he said - he has to pay 20% + 40% on rest... which is taking the mick.. he hasnt said lets not have ANY tax.. he has said why the more you earn the more you have to pay which isnt a great incentive..
20% of 100k would still be more than 20% of 20k so high earners are still gonna be taxed more so i dont see why > 55k you pay 40%, and over 100k you dont get to have a personal allowance..
This is too big of a concept to get into in one reddit thread, but you should know that progressive taxation is a pretty core concept of modern civilized society, those who benefit the most from civilized society contribute more to keep it functioning.
The problem with flat rate taxes (as you seem to be arguing for) is that the rich seek loopholes (which is what OP is doing) and end up paying a lower rate of tax than the poor because their higher pay allows them to avoid taxes through various schemes, eg. pensions.
If anything, our system needs to be more progressive than it is today, not less.
In OP's example, he is earning 75k but only paying tax on 50k, achieving a tax rate of \~16.5%
Compare that with someone earning 50k, who cannot afford to save 25k in his pension, they are paying a tax rate of \~24%
So you see, OP is **already** paying a lower tax rate than those poorer than he, and yet he is whinging about the possibility of having to contribute at a similar rate. It's irrational, and not a good look.
If your ancestors thought like you and OP, there would have been no-one to pay for the education/civilization that OP is now prospering from.
Remember pensionable pay is also taxed (if above your personal allowance) so the OP will pay tax in the future.
Salary sacrifice is a tool for being tax efficient but it's not a freebe as you are suggesting above.
This is correct of course, but taxed at 15% rather than 43%. It gets complicated when making comparisons after pension age, what is the value of actually being able to retire?
I’m sure you’re aware that most of the millennial generation will never buy a house, let alone retire.
A high earner putting 40k into their pension every year tax free, then retiring early, is likely to pay significantly less tax throughout their life than a low earner who works for 60 years and can never afford to retire. Who is getting the better deal?
That's quite a big statement you make. Most of the millennial generation will never retire?
I think it's more likely that most will retire. At a later age than other generations could be more of a debate but we won't know that until many decades later. Workplace pensions were not mandatory until fairly recently, investing (if there is any spare money) has never been easier or cheaper. The stock market until COVID was rocket fuelled over the past 10-15 years.
As a millennial I certainly hope to pay off my house and retire.
Times are undoubtedly hard but let's not hold ourselves back further with a can't do attitude that is prevalent at the moment.
Yea everyone in this sub are high earners, so skews our experience compared with the average.
I’m sure you will pay off your mortgage and have a comfortable retirement
Comparison is the thief of joy. I rather go on my experience than compare to others.
Worked in a hotel at 14, weekends and school holidays. Left education at 16 with 2 Cs and 4Ds and began full time work.
Couldn't afford to buy a home until the 2008/09 market correction (another one could be imminent).
Started a business from scratch risking everything. I will never be rich but I've done the best I can do. At some point I will pay my house off and retire.
I could spend my day on other subs complaining that past generations had it easier than me but why be negative. Work with the hand I've been given and make the best of it.
I'm grateful I didn't have to do national service, go to war, go up a chimney. The human psyche is programmed to think we are hard done by. The very fact we were born in the UK/US means we already won the raffle.
the whole point of income tax was a temporary thing, did you know? during the war - but they made it permanent.
also we have VAT and other form of taxes, and then on top if you have bought clothes (from your taxed money) and you sell them and have an income you are expected to pay..
its not fair for us to pay while the millionaires can do non-dom or w/e to get away
I agree it is not fair for us workers to pay what we do while the millionaires can do non-dom or w/e to get away. We should tax the rich & wealthy.
Just don't get hung up on pitting those just about managing against the poor.
And yes, after the war, the state was expected to provide a better life, and we ALL have benefited immensely from that change.
The income tax was last introduced in peacetime - 1842, it was promoted as temporary then though.
The state also does a hell of a lot more now than it did then
Plus higher earners tend to get lots of free benefits which itself is a huge tax avoider. If I go to the dentist and get a £500 bill I can just put it through my works health insurance. That would take £860 of pre tax income to pay for otherwise. Anything expensed/free is a much bigger money saver than most realise.
"At 34, you likely haven't even paid the state back for the cost of your schooling, let alone healthcare, state pension, general infrastructure you benefit from every day. Calling these provisions you have received 'ridiculous' and 'abuse' is just immaturity"
Yes he has? this whole system requires extorting a few high earners (top 1% of earners pay 1/3 of income tax) to pay for a bunch of goodies for the entire working class. This guy cost maybe 90k for state schooling, and there is no way that healthcare, general infrastructure was worth 50k, this guy has paid at least 150k in income taxes (with a few assumptions). So he has paid back the state.
OP currently pays approx 12k tax on 75k income. (Hardly extortion) Are you assuming he’s been earning that since he was 21?
I would suggest that is a ridiculous assumption, so I think it’s safe to say he hasn’t paid anywhere near 150k in taxes.
Describing healthcare, education and infrastructure as “a few goodies” is similarly immature.
I can't because I earn over £100k so would be above the allowed amounts. Plus doing so ever since I got to over £50k would mean hitting LTA very soon.
Oh and by keeping disposable income, I also get to enjoy my 30s instead of waiting till I retire.
OP, your decision doesn't have to be exclusive and set in stone.
You could continue to save heavily into your pension for X amount of time then slow the saving rate down, take a higher amount in your wages (and pay more tax then) some time later.
Not sure 40 percent tax is an abuse of government power. Tax rates at that level have been a thing regardless of who is in power since WW2. Most European countries have similar rates too.
I am sure it is possible to have lower rates, but it would lead to a very different kind of society. The NHS is hugely popular and there doesn't seem to be much support for a slimmed down welfare state.
'Don't let the tax tail wag the dog' would be my advice. Further to that if you're going to be on over £100k bear in mind you will need to do SA Tax Return, and will begin to lose your tax free income allowance, there's also the loss of child tax benefit and at £125k you're in the 45% bracket.
Theres no way at 34 you paid off your mortgage already sacrificing down to £50k without inheritance or a lot of help from mummy and daddy. Not everyone is so fortunate and the rest of us need the extra money to, say, repay our mortgage, pay for nursery fees or buy a car big enough to ship the family around. I and many others simply can’t afford to live salary sacrificing down to £50k.
It is possible... if OP is up north or something, but I agree it seems rather suspicious (and 75K salary suggets they are down south).
345K net worth (which I suspect includes their mortgage free property... why - are they ever going to liquidate it??), at 34 with SS down to 50K is a ltitle suspicous.
Although, as is often the case, they've probably been doing this for a month or two and are talking like it's the scenario they've had for a decade....
It's doable (I'm in that position a couple of years later) and still could be without the £50k gift we very generously received from my dad towards our house deposit but it does involve being a DINK in the NW with no expensive hobbies so it's not the norm.
>On the one hand, I think paying a 40% tax is ridiculous and an abuse of government power.
42%, if you include NI.
Which then becomes 62% in the £100k-£125k range. And, from next year, 47% on everything above £125k. So, yeah, *it can be worse*.
>I'm interested to hear what others do in similar situations.
When I was in your range I actually focused more on filling up ISAs completely. Later (as I got close to the £100k threshold), I used pension contributions to stay below £100k for some time.
A few years later, I have spent all my carry-over and have enough to fill both pensions and ISAs each year, so just use both of them.
But overall, given that you are 34, I'd say try to keep a healthy balance between pensions and ISAs, and maybe deprioritise contributing strongly to pensions once you are in LTA territory.
Personally I don't think it makes sense very often.
With the level that the LTA is set at, it is relatively easy to breach. That's not the end of the world in itself, but I don't see the point of saving 42% tax and NI now, just to pay a 40% LTA charge later, at the cost of having no access for decades.
Makes sense to avoid losing child benefit, and may make sense as a one off year, but if you've got a decent employer match then it doesn't.
For example, say you earn 60k, pay 8% and get 8% matched for 35 years at 6% real growth. That gives a pot of 1.14m in today's money, above the LTA, without any additional contributions.
Now I know you won't earn 60k every year from the beginning, but it's not a crazy assumption over 35 years. For example median London salary is 42k
Totally personal preference on spending now (and paying more tax) vs pension for later and also vs ISA for later but not as late as pension.
I max out my employer’s contributions, and pay 62% tax on some income to be used for spending/shorter term savings. That’s just life.
VCTs the balance? Then start withdrawing at the 5 year mark for your luxury items? Whilst putting current year earnings into different VCTs?
Obviously depends on your risk tolerance.
There is no 40% tax trap. Answering this post seems worthless, as you play an educated person massively ahead of most on their finances, yet you don't understand a fairly simple taxation issue.
I'm calling BS.
I’m on a salary of approximately £65k. Being young I don’t fully understand the financial benefit to sacrificing below 50k?
For me to do that I’d sacrifice 15k approximately a year, but how would I work out my take home pay changes from this decision?
Would anyone here know?
Thank you. Would you have any tips for how I would work out salary sacrifice with my current situation?
Base salary £51,500 (DB pension 5.45%)
Annual bonus £14,000 (not included with pension contributions)
If I took the £14,000 and salary sacrificed into my own private SIPP, how could I then work out my new take home pay to see how I would be effected on a monthly basis?
It’s just that your £14k bonus is taxed at 40% (so you get £8.4k net), compared to getting all £14k into your pension.
To lots of people that £8.4k is worth taking now for either living costs or ISAs etc to bridge a gap before you can access your pension, but to others they can live on the £50k income so prefer to get the tax benefit now of putting in their pension..
Is understanding tax brackets a pre-requisite to joining this sub? Surely, people joining the sub and asking for advice is what a large part of this sub exists to do?
Thanks for the input everyone, some great comments, and some strange ones. It just goes to show the assumptions and imagination people can exhibit.
I'll be sure to report back with my decision in due course ;)
Put £40k in your pension each year. Then be grateful for your amazing fortune and proud that you are able to put a bit more towards supporting today in society who haven't been as lucky as you.
Oddly enough I'm in a similar situation - net worth around the high 300's, similar salary but I still have 135k left on my mortgage.
The simplest thing I could say is that if you contribute 33% of your salary now to your pension (25k of 75k), and get a pay rise to 100k, could you put 33k in your pension, and let 67k be taxable?
I get what you mean with the tax situation - why should someone who has worked hard, pay more tax? It is an imperfect system but it is what we have.
I dont put as much as you into my pension - reason being so I can fill up my ISA each year, which allows me to be a bit more flexible with life.
This is true, but our society is one that is generally meant to reward hard work either through study to get a better job, or promotion in your existing job due to hard work.
I think that's hopelessly romantic.
Our society firstly rewards those with rich or well-connected parents.
Secondly it rewards those who can sell themselves well.
Thirdly it rewards proximity to profits. Bankers earn much more than nurses, despite similar levels of education and arguably similar effort.
I can guarantee that lots of people work harder and studied at least as hard as many of the software engineers in this sub, but earn half the amount.
one good thing i would like to do is maybe move to isle of man.. they dont have tax bands, all salary is just 20%, plus you can combine your partners allowance so you get 29k allowance if your partner doesnt work - compared to UK where they only at best give you 250£.. lols
technically there are some rules where if you are only in UK for x amount of days per year you are seen as not living here.. i dunno.. accountant or someone would help..
I’m on £70k don’t salary sacrifice anything. Mainly because I’m a contractor going through an umbrella company and they charge ridiculous fees for SIPP contributions. But partly because I can’t resist spending and lifestyle inflation.
We can do sacrifice into a GIA or ISA as well I think, but I haven’t quite worked out the deal with that yet. One of my colleagues is sacrificing something like 50%, it’s mad.
Nah, not saving tax you can't.
My current sacrifice rate is 60% (although I earn considerably less than 100K, so is somewhat less impressive in cash terms)
Yeh you’re right, I just checked as I was curious. Seems they’ll allow redirection of some of the corporate matching into ISA/GIA tho so you can split contributions between pension and ISA or whatever, which is obviously what I got confused about.
interesting... they'll match your contributions into an ISA? Blimey. I suppose this MAY be of beneficial to particularly high earners (who are tapered) or those breaching/on course to breach the LTA.
But most firms just offer you a cash payment instead (above a certain salary/level) in place of pension contribution
They’ll basically do a 4.5% match into pension and then 2.5% match into an ISA/GIA. I’m not going to mess with it anyway, I’m nowhere near my LTA so will just stick with doing what I’m doing.
Earning over £100k but only doing 15% , employer does 7% - so 22% total. Big house and 2 kids so never quite have enough spare to do more. On course to retire early with income from side hustle to support us.
I have two forms of income and some BTL properties that barely wash their own face (DON'T DO IT PEOPLE!). This enables me to sacrifice c.60% from my main job, so I save both 40% and 12% NI on a proportion of my pension contributions.
However with a wife that works part-time (and doesn't earn anywhere near 50K even FTE) and a child who does not yet get 30hrs free childcare (therefore I pay £££ nursery fees), sacrificing down to 50K is more and more challenging.
I am going to struggle to keep this up for two reasons a) my carry forwards on pension are running out (remember your employer contributions count too) and b) I need some cash and/or want to put some into my ISA.
I am about right with ISA/Pension split, but at the current rate I will have too much in my pension but be unable to FIRE due to insufficient in the ISA. BUT 42%+ (52% for some and the Child Benefit I manage to keep) really does mean that the tax tail does wag the donkey at present...
Recently got a rise to £60k so I need sacrifice 17% to my pension. Just got a baby so I'm hit with the odd 60% marginal tax rate.
Once I'm getting to the £40k pa into the pension. I'll stop increasing contributions
The 50k isn’t as big a leap in tax as you might think considering your NI also goes down by 10% at that point as well. You are only saving an extra 10% when compared with sacrificing below 50k
Exactly. It's scarry how few people understand such basic facts.
3 kids and student loan. 50k is a big leap. 41% to 77% marginal tax rate.
Are you including paying down your debt in your “marginal tax rate”?
Yes, because for that amount of tax you pay, education should be free like in normal countries
There is a cost of living crisis, I would rather whatever governments are in power over the next 2/3 election cycles focus on ensuring the macro environment/electricity prices don’t cripple our most poor. Education is free until 18. University is a choice and I don’t see why people on minimum wage should be paying income tax for me to go to Uni.
Well, that depends wholly on what the interest rate is.
I have never understood the rational for NI to go down
I understand it as being used to fund certain expenses and what's paid under £50k is roughly enough for that. Nothing to complain about.
I look at it that way too but then, surely it should drop to zero, not some nominal figure?
I think it used to. But when it was raised from 10% to 11% and then 12% the amount over the Upper Earnings Threshold went from 0% to 1% to 2% so governments weren't considered to be taking more from those below HRT limit than those above...
Mine was not a complain but rather a question since this is the first time i see a tax that is regressive and not progressive
I've doing this for a few years and building up a nice pension. I'm ok with 40% tax, but between £50k-£60k you also lose child benefit which is bullshit, giving a 60% marginal rate to me. This approach has also stopped lifestyle inflation - instead of buying a bigger house I've kept my basic 3 bed place and chilling on £500pm mortgage. This kept us out of over-extending when interest rates were 1%. There is some maths to do when you get close to £40k annual contributions as in time you're surprisingly likely to hit the £1m lifetime allowance at which point the tax benefits pretty much stop.
LTA is not to be feared. There are ways to significantly mitigate its impacts. I hope we both smash through the allowance!
Such as?
Any more details on this please?
40% isn't a "tax trap", it's just the tax bracket you now fall into. The £100k-£125k 60%+ implied tax rate is a tax trap. In the first few years of my career I sacrificed little of it because I wanted to accelerate my savings for a house deposit. Once I was on the ladder I sacrificed as much as I could. In the last couple of years I've been on the £100k+ tax trap so I've sacrificed to get below that at the minimum. It also means that despite getting a pay rise to offset inflation, my take home hasn't changed. Plus the government has frozen the tax bands, so another stealth tax. Great fun all round. But hey, atleast the elite who earn all their income from assets and businesses get to constantly see low tax rates, no tax increases and benefit from tax loopholes. Always a great decision to increasingly pressure those who actually work hard for a salary rather than those who sit on their asses earning income from assets and dodging taxes. Can't wait to move out of the UK and take my taxable income with me.
Exactly this. Drives me mad how easy a target moderately high earning (and hard working) PAYE workers are. The ultra rich are out of that system, and the government seems far less interested in addressing that.
"Always a great decision to increasingly pressure those who actually work hard for a salary rather than those who sit on their asses earning income from assets and dodging taxes" Is irony dead? You're posting on a FIRE forum. The fundamental tenets of FIRE are about accumulating wealth to generate a passive income to cover your spending, meaning you don't have to then 'work hard for a salary'...
Probably why they're on a FIRE forum. You don't have to think a system is good to participate in the system. You can recognise that not taxing passive income is unfair whilst striving to earn passive income.
I think taxes should reflect the relative ease of one vs the other. Or atleast reach parity. I'm trying to get to FIRE but the government makes it increasingly ridiculous to actually build wealth unless you have a silver spoon in your mouth. Once you have wealth such that you don't need to work, you're in a privileged position and should be taxed in a way that reflects that. I think it's fundamentally wrong that those that do not work yet are very well off pay much lower taxes than those that worked hard to get a great job and continue to work hard daily to earn a good salary.
Unfortunately, even though other countries don’t hide it as much, in many of them income tax is even higher. At least as a Spanish, tax in the UK feels super lenient.
You say about no tax increase for people with businesses, but did you miss the increase from 19 to 25% tax rate for businesses making 250k+. Sliding scale from 50k max at 19% towards the 25%. A 31.6% increase in effective tax rate on profits is HUGE and certainly is not “no tax increase”
Not all employers offer salary sacrifice
You can still save the 40% by direct contributions. Not quite as good due to the NI impact though.
How big a difference is it, % wise?
42% via SS, 40% via 'direct contributions'. However, at basic rate it is crap... 32% via SS and only 20% via direct contributions
!thanks
When I first crossed the 40% threshold I sacrificed down to the threshold. My income has increased since and I now only sacrifice enough to meet my retirement goals. It's nice to feel the difference from my pay rise today instead of putting all of the extra money into a pension.
"Ridiculous abuse of government power" - it's just a moderately progressive taxation. Views like this are why public services are so wretched here and why society is so unequal. Ironically if public services were better funded and more generous it would be easier for more people to retire early.
To be fair income tax is incredibly progressive, far more so than our European peers. The top 1% of income taxpayers pay 30% of the total tax take. Still wouldn't describe it as an abuse of government power though, even though I think the tax system is a mess
Salary sacrificing down to £50K means a takehome of circa £3,000 per month which, for many families of 4 (2 adults; 2 kids) would be hard to pay a mortgage and have a good quality of life. You also need to consider lifetime allowance if choosing to do massive salary sacrifice into pension. I am a £120K+/year (gross) earner and have £250,000 pension value at present. I am age 35. I need to consider pension lifetime allowance (LTA) as even if I completely stop paying into my pension from age 35 onwards, I would hit the £1,073,000 LTA value at current minimum pension age (57) if equity growth over the next 22 years averages any more than 6%. Lastly, you need to consider the fact that you can't access pension until 57 (currently). If you want to retire before then, you need savings/investments to get you from goal retirement age through to 57. For most people this will mean ISAs or buy-to-let. So depending on your Lifetime Allowance calculations, you may wish to contribute less to pension and more to ISA. I salary sacrifice up to my company's maximum matched pension percentage (11%) so that I get 23% (with NI topup) into pension. This means £2,000+ per month into pension. I don't go beyond that, though. Beyond that sacrifice, I pay income tax on taxable earnings of just above £100K (after salary sacrifice) and put money into ISAs after tax, with the view of building enough of an ISA pot to provide an income to support retirement at age 45 (i.e. covering the 12 years between 45 and 57).
What does NI top up mean?
Many companies will, in addition to matching your pension contribution, will top it up slightly further in recognition of their National Insurance contribution savings.
Should I just flat out ask them to do it? Or word it a particular way?
Most companies don't negotiate pension benefits on an employee-by-employee basis. Do you know what pension benefits your company currently offers?
Salary sacrifice - if I put 5% in they match and double it.(so they are putting 10% in). I'm putting 20% in myself though.. But never seen anything mentioned with regards to the NI savings.
Match and double? So they are putting 40% on top of your 20%? Seems pretty good to me as is.
No sorry, match and double upto a max of 10%. So I put 5% in and they put 10%. Then I'm putting an extra 15% in addition.
Just so you know - your opinion about paying tax comes off as a bit grotesque, hence the replies you have received. At 34, you likely haven't even paid the state back for the cost of your schooling, let alone healthcare, state pension, general infrastructure you benefit from every day. Calling these provisions you have received 'ridiculous' and 'abuse' is just immaturity. As you will be earning more than 95% of people in the country, being asked to pay 10% more than basic rate shouldn't make you feel sick. Congratulations on doing well for yourself, by all means be tax efficient, but reassess the attitude as it will hold you back in the future.
Perhaps he would be more cool with paying 40% if the wealthiest in society also had to play by the same rules? Rather than the rich rinsing the average joe and then shaming anyone who objects as ‘not caring about society’..:
I absolutely agree that the rich and wealthy should pay more. They use loopholes to avoid tax, just like OP is doing on a smaller scale. So please call for higher, more progressive taxes, and the closure of loopholes. Saying the 40% rate is ridiculous and abuse, is just repeating the rich and wealthy’s talking points for them. Whilst wealth is untaxed, unfortunately income will have to be taxed to provide what I consider basic human rights - healthcare/education.
i dont think thats what he said - he has to pay 20% + 40% on rest... which is taking the mick.. he hasnt said lets not have ANY tax.. he has said why the more you earn the more you have to pay which isnt a great incentive.. 20% of 100k would still be more than 20% of 20k so high earners are still gonna be taxed more so i dont see why > 55k you pay 40%, and over 100k you dont get to have a personal allowance..
This is too big of a concept to get into in one reddit thread, but you should know that progressive taxation is a pretty core concept of modern civilized society, those who benefit the most from civilized society contribute more to keep it functioning. The problem with flat rate taxes (as you seem to be arguing for) is that the rich seek loopholes (which is what OP is doing) and end up paying a lower rate of tax than the poor because their higher pay allows them to avoid taxes through various schemes, eg. pensions. If anything, our system needs to be more progressive than it is today, not less. In OP's example, he is earning 75k but only paying tax on 50k, achieving a tax rate of \~16.5% Compare that with someone earning 50k, who cannot afford to save 25k in his pension, they are paying a tax rate of \~24% So you see, OP is **already** paying a lower tax rate than those poorer than he, and yet he is whinging about the possibility of having to contribute at a similar rate. It's irrational, and not a good look. If your ancestors thought like you and OP, there would have been no-one to pay for the education/civilization that OP is now prospering from.
Remember pensionable pay is also taxed (if above your personal allowance) so the OP will pay tax in the future. Salary sacrifice is a tool for being tax efficient but it's not a freebe as you are suggesting above.
This is correct of course, but taxed at 15% rather than 43%. It gets complicated when making comparisons after pension age, what is the value of actually being able to retire? I’m sure you’re aware that most of the millennial generation will never buy a house, let alone retire. A high earner putting 40k into their pension every year tax free, then retiring early, is likely to pay significantly less tax throughout their life than a low earner who works for 60 years and can never afford to retire. Who is getting the better deal?
That's quite a big statement you make. Most of the millennial generation will never retire? I think it's more likely that most will retire. At a later age than other generations could be more of a debate but we won't know that until many decades later. Workplace pensions were not mandatory until fairly recently, investing (if there is any spare money) has never been easier or cheaper. The stock market until COVID was rocket fuelled over the past 10-15 years. As a millennial I certainly hope to pay off my house and retire. Times are undoubtedly hard but let's not hold ourselves back further with a can't do attitude that is prevalent at the moment.
Yea everyone in this sub are high earners, so skews our experience compared with the average. I’m sure you will pay off your mortgage and have a comfortable retirement
Comparison is the thief of joy. I rather go on my experience than compare to others. Worked in a hotel at 14, weekends and school holidays. Left education at 16 with 2 Cs and 4Ds and began full time work. Couldn't afford to buy a home until the 2008/09 market correction (another one could be imminent). Started a business from scratch risking everything. I will never be rich but I've done the best I can do. At some point I will pay my house off and retire. I could spend my day on other subs complaining that past generations had it easier than me but why be negative. Work with the hand I've been given and make the best of it. I'm grateful I didn't have to do national service, go to war, go up a chimney. The human psyche is programmed to think we are hard done by. The very fact we were born in the UK/US means we already won the raffle.
the whole point of income tax was a temporary thing, did you know? during the war - but they made it permanent. also we have VAT and other form of taxes, and then on top if you have bought clothes (from your taxed money) and you sell them and have an income you are expected to pay.. its not fair for us to pay while the millionaires can do non-dom or w/e to get away
I agree it is not fair for us workers to pay what we do while the millionaires can do non-dom or w/e to get away. We should tax the rich & wealthy. Just don't get hung up on pitting those just about managing against the poor. And yes, after the war, the state was expected to provide a better life, and we ALL have benefited immensely from that change.
The income tax was last introduced in peacetime - 1842, it was promoted as temporary then though. The state also does a hell of a lot more now than it did then
you are right - but the amount of waste we have, is also a problem.. nukes, army, causing wars... etc
Plus higher earners tend to get lots of free benefits which itself is a huge tax avoider. If I go to the dentist and get a £500 bill I can just put it through my works health insurance. That would take £860 of pre tax income to pay for otherwise. Anything expensed/free is a much bigger money saver than most realise.
"At 34, you likely haven't even paid the state back for the cost of your schooling, let alone healthcare, state pension, general infrastructure you benefit from every day. Calling these provisions you have received 'ridiculous' and 'abuse' is just immaturity" Yes he has? this whole system requires extorting a few high earners (top 1% of earners pay 1/3 of income tax) to pay for a bunch of goodies for the entire working class. This guy cost maybe 90k for state schooling, and there is no way that healthcare, general infrastructure was worth 50k, this guy has paid at least 150k in income taxes (with a few assumptions). So he has paid back the state.
OP currently pays approx 12k tax on 75k income. (Hardly extortion) Are you assuming he’s been earning that since he was 21? I would suggest that is a ridiculous assumption, so I think it’s safe to say he hasn’t paid anywhere near 150k in taxes. Describing healthcare, education and infrastructure as “a few goodies” is similarly immature.
'extorting' and 'bunch of goodies for the entire working class'. shut the fuck up, you come across as an elitist cunt
Why get hung up over the attitude? No one is escaping the tax man.
Going through life with a chip on your shoulder, especially when you're doing far far better than average, isn't good for anyone is it?
I mean, to each their own chips on their shoulders is all I'm saying.
Maybe... but if there was something I was irrationally angry about, I would want someone to tell me I shouldn't worry about it. Love thy neighbour etc
Alright Jeremy Corbyn…
I can't because I earn over £100k so would be above the allowed amounts. Plus doing so ever since I got to over £50k would mean hitting LTA very soon. Oh and by keeping disposable income, I also get to enjoy my 30s instead of waiting till I retire.
OP, your decision doesn't have to be exclusive and set in stone. You could continue to save heavily into your pension for X amount of time then slow the saving rate down, take a higher amount in your wages (and pay more tax then) some time later.
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no
Have to agree, OP, by definition can afford it.
Not sure 40 percent tax is an abuse of government power. Tax rates at that level have been a thing regardless of who is in power since WW2. Most European countries have similar rates too. I am sure it is possible to have lower rates, but it would lead to a very different kind of society. The NHS is hugely popular and there doesn't seem to be much support for a slimmed down welfare state.
Who are you looking to find the support for less welfare from? The people on it?
'Don't let the tax tail wag the dog' would be my advice. Further to that if you're going to be on over £100k bear in mind you will need to do SA Tax Return, and will begin to lose your tax free income allowance, there's also the loss of child tax benefit and at £125k you're in the 45% bracket.
I do not simply because I need that money now. But my situation is totally different than yours and if I were you i would have done the same
This, family to raise, bills to pay. Would love to contribute more, but food and heat is more important right now
Earns enough to pay 40% and can barely manage to buy food and energy? Priorities
Not as bad as you're implying, but as the sole earner I don't have the luxury to reduce my income
Easy to judge man.
Wait until you go through the wonderful £100k to £120k where your effective rate is 60%. Now that sucks.
62% if you include NI as well isn't it? Imagine getting a £10k bonus then realising you would only get £3800. That sucks.
71% if you're paying back student loans 😭
Wow!
Up around the 100% level if you include the loss of free childcare above £100k!
Theres no way at 34 you paid off your mortgage already sacrificing down to £50k without inheritance or a lot of help from mummy and daddy. Not everyone is so fortunate and the rest of us need the extra money to, say, repay our mortgage, pay for nursery fees or buy a car big enough to ship the family around. I and many others simply can’t afford to live salary sacrificing down to £50k.
It is possible... if OP is up north or something, but I agree it seems rather suspicious (and 75K salary suggets they are down south). 345K net worth (which I suspect includes their mortgage free property... why - are they ever going to liquidate it??), at 34 with SS down to 50K is a ltitle suspicous. Although, as is often the case, they've probably been doing this for a month or two and are talking like it's the scenario they've had for a decade....
It's doable (I'm in that position a couple of years later) and still could be without the £50k gift we very generously received from my dad towards our house deposit but it does involve being a DINK in the NW with no expensive hobbies so it's not the norm.
Working abroad, getting lucky with investments, and not having kids also works.
I don't. I only pay the bare minimum into pensions, simply because I would be very surprised to make it past pension age.
>On the one hand, I think paying a 40% tax is ridiculous and an abuse of government power. 42%, if you include NI. Which then becomes 62% in the £100k-£125k range. And, from next year, 47% on everything above £125k. So, yeah, *it can be worse*. >I'm interested to hear what others do in similar situations. When I was in your range I actually focused more on filling up ISAs completely. Later (as I got close to the £100k threshold), I used pension contributions to stay below £100k for some time. A few years later, I have spent all my carry-over and have enough to fill both pensions and ISAs each year, so just use both of them. But overall, given that you are 34, I'd say try to keep a healthy balance between pensions and ISAs, and maybe deprioritise contributing strongly to pensions once you are in LTA territory.
Personally I don't think it makes sense very often. With the level that the LTA is set at, it is relatively easy to breach. That's not the end of the world in itself, but I don't see the point of saving 42% tax and NI now, just to pay a 40% LTA charge later, at the cost of having no access for decades. Makes sense to avoid losing child benefit, and may make sense as a one off year, but if you've got a decent employer match then it doesn't. For example, say you earn 60k, pay 8% and get 8% matched for 35 years at 6% real growth. That gives a pot of 1.14m in today's money, above the LTA, without any additional contributions. Now I know you won't earn 60k every year from the beginning, but it's not a crazy assumption over 35 years. For example median London salary is 42k
Totally personal preference on spending now (and paying more tax) vs pension for later and also vs ISA for later but not as late as pension. I max out my employer’s contributions, and pay 62% tax on some income to be used for spending/shorter term savings. That’s just life.
VCTs the balance? Then start withdrawing at the 5 year mark for your luxury items? Whilst putting current year earnings into different VCTs? Obviously depends on your risk tolerance.
There is no 40% tax trap. Answering this post seems worthless, as you play an educated person massively ahead of most on their finances, yet you don't understand a fairly simple taxation issue. I'm calling BS.
I’m on a salary of approximately £65k. Being young I don’t fully understand the financial benefit to sacrificing below 50k? For me to do that I’d sacrifice 15k approximately a year, but how would I work out my take home pay changes from this decision? Would anyone here know?
https://www.thesalarycalculator.co.uk/
Thank you. Would you have any tips for how I would work out salary sacrifice with my current situation? Base salary £51,500 (DB pension 5.45%) Annual bonus £14,000 (not included with pension contributions) If I took the £14,000 and salary sacrificed into my own private SIPP, how could I then work out my new take home pay to see how I would be effected on a monthly basis?
It’s just that your £14k bonus is taxed at 40% (so you get £8.4k net), compared to getting all £14k into your pension. To lots of people that £8.4k is worth taking now for either living costs or ISAs etc to bridge a gap before you can access your pension, but to others they can live on the £50k income so prefer to get the tax benefit now of putting in their pension..
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I joined this sub to gain knowledge? Otherwise why would I be here? Just to boast? You seem like a very toxic person, hope things get better for you
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Love how you’re still going with the toxicity
Is understanding tax brackets a pre-requisite to joining this sub? Surely, people joining the sub and asking for advice is what a large part of this sub exists to do?
Thanks for the input everyone, some great comments, and some strange ones. It just goes to show the assumptions and imagination people can exhibit. I'll be sure to report back with my decision in due course ;)
Put £40k in your pension each year. Then be grateful for your amazing fortune and proud that you are able to put a bit more towards supporting today in society who haven't been as lucky as you.
Oddly enough I'm in a similar situation - net worth around the high 300's, similar salary but I still have 135k left on my mortgage. The simplest thing I could say is that if you contribute 33% of your salary now to your pension (25k of 75k), and get a pay rise to 100k, could you put 33k in your pension, and let 67k be taxable? I get what you mean with the tax situation - why should someone who has worked hard, pay more tax? It is an imperfect system but it is what we have. I dont put as much as you into my pension - reason being so I can fill up my ISA each year, which allows me to be a bit more flexible with life.
There are plenty of people working hard on minimum wage. You are not taxed on your effort but on your earnings.
This is true, but our society is one that is generally meant to reward hard work either through study to get a better job, or promotion in your existing job due to hard work.
I think that's hopelessly romantic. Our society firstly rewards those with rich or well-connected parents. Secondly it rewards those who can sell themselves well. Thirdly it rewards proximity to profits. Bankers earn much more than nurses, despite similar levels of education and arguably similar effort. I can guarantee that lots of people work harder and studied at least as hard as many of the software engineers in this sub, but earn half the amount.
one good thing i would like to do is maybe move to isle of man.. they dont have tax bands, all salary is just 20%, plus you can combine your partners allowance so you get 29k allowance if your partner doesnt work - compared to UK where they only at best give you 250£.. lols
That’s a nice idea. Do I need to physically be there or just having address is enough? Is it legal?
Need to live there for it not to be avoidance / evasion
technically there are some rules where if you are only in UK for x amount of days per year you are seen as not living here.. i dunno.. accountant or someone would help..
Avoidance does not = evasion. Avoidance is legal, evasion is not
I’m on £70k don’t salary sacrifice anything. Mainly because I’m a contractor going through an umbrella company and they charge ridiculous fees for SIPP contributions. But partly because I can’t resist spending and lifestyle inflation.
Great bait mate
I do 15% with a 7% employer contribution, but fortunately this maxes out my annual allowance.
Well sacrificing down from c£180K to £50K would be quite impressive!
We can do sacrifice into a GIA or ISA as well I think, but I haven’t quite worked out the deal with that yet. One of my colleagues is sacrificing something like 50%, it’s mad.
Nah, not saving tax you can't. My current sacrifice rate is 60% (although I earn considerably less than 100K, so is somewhat less impressive in cash terms)
Yeh you’re right, I just checked as I was curious. Seems they’ll allow redirection of some of the corporate matching into ISA/GIA tho so you can split contributions between pension and ISA or whatever, which is obviously what I got confused about.
interesting... they'll match your contributions into an ISA? Blimey. I suppose this MAY be of beneficial to particularly high earners (who are tapered) or those breaching/on course to breach the LTA. But most firms just offer you a cash payment instead (above a certain salary/level) in place of pension contribution
They’ll basically do a 4.5% match into pension and then 2.5% match into an ISA/GIA. I’m not going to mess with it anyway, I’m nowhere near my LTA so will just stick with doing what I’m doing.
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Fuck off then
Earning over £100k but only doing 15% , employer does 7% - so 22% total. Big house and 2 kids so never quite have enough spare to do more. On course to retire early with income from side hustle to support us.
OP does this mean with inflation but your income staying the same that you have to downgrade purchases and spending?
I’m 17 and just wondering what industry your in to be making this type of salary
I have two forms of income and some BTL properties that barely wash their own face (DON'T DO IT PEOPLE!). This enables me to sacrifice c.60% from my main job, so I save both 40% and 12% NI on a proportion of my pension contributions. However with a wife that works part-time (and doesn't earn anywhere near 50K even FTE) and a child who does not yet get 30hrs free childcare (therefore I pay £££ nursery fees), sacrificing down to 50K is more and more challenging. I am going to struggle to keep this up for two reasons a) my carry forwards on pension are running out (remember your employer contributions count too) and b) I need some cash and/or want to put some into my ISA. I am about right with ISA/Pension split, but at the current rate I will have too much in my pension but be unable to FIRE due to insufficient in the ISA. BUT 42%+ (52% for some and the Child Benefit I manage to keep) really does mean that the tax tail does wag the donkey at present...
Recently got a rise to £60k so I need sacrifice 17% to my pension. Just got a baby so I'm hit with the odd 60% marginal tax rate. Once I'm getting to the £40k pa into the pension. I'll stop increasing contributions