Harringay, Haringey - So Good they Spelt it Twice!
How to pay 10% tax on £100,000 income
First, you need to be outside of PAYE and you need to be a freelancer. Essentially you are a one person limited liability company that contracts out your services on a short term (less than two years) basis to people willing to pay for them. Everything from computer programming to working on an oil rig can be done this way. It seems it is only the public sector that will pay managers this way.
Assuming that your company is paid £100,000 per annum for your services, you could do it like this:
Pay yourself £8,000 PAYE. This would incur £49 of employee NI and £72 of employer NI so your total tax paid so far is £121.
Pay yourself £42,000 as a dividend, on which you will pay £2,742 tax, bringing your total tax so far to £2,863.
Pay the remaining £50,000 into your pension, tax free. This leaves your total income tax unchanged at £2,863 however you will have to pay corporation tax on your dividends.
Pay your small company corporation tax of 20% on the £40,000 "profit". This takes your total tax bill to £10,863 which, forgive my provocative headline, is closer to 11%.
This works great if you are about to retire in a few years and don't need all of your income to support yourself.
There are companies out there that will offer you up to 91% of your pay and I'm not sure how they do it but they're brazen enough to have pretty snazzy websites so I presume that HMRC are OK with it.
If you're inside PAYE then fear not, you can still do pretty well by making a massive voluntary contribution to your pension. On £100,000 salary you would pay £35,221 in personal income tax (not including your employer's NI contribution on your behalf of £12,768). However if you contribute £30,000 to your pension, the government would allow you to claim back the tax that you had paid on that contribution, which in this case was of course £12,000. This takes your total tax bill back down to £23,221 which is 23% (the original figure was 35%).
The key is, you have to be wealthy and not need that income yet. Imagine if you had no mortgage and your children were all grown up and had left home. Think how cheaply you could live then and you'd probably be ready to retire in a few years anyway.
That said, there are companies out there that will essentially loan you a percentage of your pension (up to 50%) in exchange for getting their hands on it, tax free, when you retire.
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Replies to This Discussion
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Permalink Reply by John McMullan on
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I'm not going to comment on my income, tax status etc, this is completely hypothetical (I know of nobody doing this) but it's possible and as you can see, the income tax system is slanted in favour of those that are wealthy/frugal and can defer their income.
Agree about the dodgy outfits offering 91% of your income.
The IR35 thing is a bit nasty. Then they would get the 13% employer NIC AND the 20% VAT.
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Permalink Reply by AndrewAW1 on
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You're missing the tax you'd pay when you take the pension from that calculation though, it probably wouldn't be as high as if you'd taken everything as PAYE but you are deferring some of the tax.
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When you retire you can have half of your SIPP as a lump sum and you buy an annuity with the rest. There is no tax involved at all. Please post a link if you think I'm still wrong (I may be).
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Yes, the lump sum is tax-free (although limited to 25%, not 50%) but unfortunately your annuity is still subject to tax somewhere (you may not see it come off) HMRC
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Ah OK, not something I've looked into but then I don't have anything like enough saved yet to be paying myself above the PAYE threshold in 25 years' time.
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Permalink Reply by Chris Setz on
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John, I guess you put this up to amuse us/yourself - hope nobody takes you too seriously :)
Apart from the morality of tax avoidance, the scheme just seems wrong in fact - it doesn't work this way.
I am not a lawyer/tax expert or whatever but even I know that you can't put more into a pension scheme than you earn (£8k in your example) for instance. Doesn't this schoolboy error underline the need for professional advice on professional matters?
p.s. I've heard that that anything above around £36k/yr doesn't bring any more pro-rata happiness.
What is the cost to you personally of earning £100,000 (in my new units: 'stress per decade')? Were it to shorten your life by, say, fifteen years, is it actually a positive return on your investment?
What is the opportunity cost of 'jam tomorrow'?
People do say that certain occupations (often 'vocational' ones) offer benefits that, ironically, wealthier people prize above rubies once they've made their pile, too late to obtain.
How do you account for the different value inherent in teaming with marvellous, inspiring people doing stuff valued by your community as opposed to, say, 'merchant bankers' vilified by same?
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Company directors can put in up to £50K a year Chris, £1.5 million in a lifetime. I think it may have been reduced to £40K very recently. Anyway, this is nothing like my tax situation, it was something hypothetically talked about at work. I just thought it was interesting and that there had been some interest in the tax lives of the rich and famous recently but what I read in the media was just not right.
So two people have now jumped on this saying that I'm completely wrong, which is very brazen and forthright for HoL, but without a shred of evidence. As for the schoolboy error comment, you Sir, owe me a pint.
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If I'm right, it is a basic 'schoolboy' error John. No denigration intended. I'll certainly buy you a pint whatever happens, just because you're a nice guy.
What proof would you accept?
Here's something from HMRC in the 'tax basics' section:
There's no limit on the amount of contributions either a member or an employer can pay into their pension scheme.
Tax relief on member contributions is limited to 100% of your earnings.
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If you are a company director then your contributions are limited to £50K.
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From the page you quote (first line!):
You can save as much as you like towards your pension each year, but there's a limit on the amount that will get tax relief.
Your 'scheme':
>>Pay the remaining £50,000 into your pension, tax free
simply won't work, OK?
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Err, no he isn't - the page you quote has this sidebar from the article author:
'There are no longer any limits to contributions you can make from your limited company income into pension funds; the amounts must simply not be very much larger than your actual declared corporate income'
John's 'actual declared corporate income' is £8k in his worked example:
>>Pay the remaining £50,000 into your pension, tax free.
That's the bit that's wrong. Put as much as you wish into your pension, but only his £8k attracts the relief his scheme depends on.
Imagine planning a lifetime of income on a false assumption - penalty? Poverty! Letting down your entire family!
Don't even get me started on the fact that many, many people lost significant amounts of money putting their cash into pensions that crashed, and then had to buy annuities that were appallingly bad value for money, losing further. This has literally ruined lives.
One quarter of our population are becoming pensionable.
How many took on their own management (self-invested) and lost even more? Oh and what's the return on 'safe' pension investments nowadays?
My main point remains - if all this isn't an argument for paying professionals, what is?
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£8K is the PAYE income to you as an employee of the company. The dividends count as income too. At no point did I call it "declared corporate income". It was the salary you would pay yourself as an employee of the company. As a shareholder in the company you would also be allowed to take dividends.
I have said before on HoL that I think this personal saving for your pension is completely wrong and that it should be socialised. According to my family history and quotes for life insurance I think I have about a 50% chance of even being able to claim my pension at 65. Certainly my father was dead before then.
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