Consider a remuneration package of:
- £110,000 p.a. base
- variable bonus paid in month of May each year
- 6% employer pension contribution based on £110,000 [£6,600 p.a.]
Would the following salary exchange mechanism work, mindful of the annual allowance and associated pension provisions:
1) £12,000 p.a. from base salary exchanged as employer pension contributions, i.e. £1,000 per month
2) Bonus is exchanged as one-off employer pension contribution up to and not exceeding the value of £20,000
3) Any remaining bonus is paid as normal
Thus if bonus exceeds £20,000, then the above system should result in an annual pension contribution of:
6% of £110,000, which is £6,600 + £12,000 base sacrifice + £20,000 bonus sacrifice,
... which totals £38,600.
Which is below the £40,000 annual allowance.
Does the above system seem reasonable?
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Salary exchange and six-figure curse
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- Lemon Quarter
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Re: Salary exchange and six-figure curse
yup,
and it keeps the base salary just below the 100k limit at which personal allowances get withdrawn (resulting in a marginal tax rate of 62%)
tuk020
and it keeps the base salary just below the 100k limit at which personal allowances get withdrawn (resulting in a marginal tax rate of 62%)
tuk020
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- Lemon Slice
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Re: Salary exchange and six-figure curse
That looks fine save that, if the bonus and taxable savings etc income together is more than £33400, you would have the Pension Annual Allowance restricted below £40k of course as your total income would exceed £150k.
Re: Salary exchange and six-figure curse
Thanks for taking the trouble to calculate the £33400 figure @DrBunsenHoneydew. This concords exactly with my own calculation.
Are there any creative ways to deal with the situation of bonus (+savings income) exceeding £33400?
Perhaps one idea would be to ask my employer to retain the sum for me and/or use it in the future to buy equity in the firm if my employer will let me?
Are there any creative ways to deal with the situation of bonus (+savings income) exceeding £33400?
Perhaps one idea would be to ask my employer to retain the sum for me and/or use it in the future to buy equity in the firm if my employer will let me?
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- Lemon Quarter
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Re: Salary exchange and six-figure curse
In the current climate (see BBC!) I would be astonished if your employer will go out of its way to help you avoid income tax with some contrived arrangement.
Unfortunately I suspect your better options are to:
- suck it up;
- suggest to your employer that you reduce your hours to take you out of that marginal band; or
- suggest that your employer give you a pay rise so that on a net basis you are appropriately incentivised, given your confiscatory marginal tax rate.
Unfortunately I suspect your better options are to:
- suck it up;
- suggest to your employer that you reduce your hours to take you out of that marginal band; or
- suggest that your employer give you a pay rise so that on a net basis you are appropriately incentivised, given your confiscatory marginal tax rate.
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- Lemon Quarter
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Re: Salary exchange and six-figure curse
Lynx wrote:Are there any creative ways to deal with the situation of bonus (+savings income) exceeding £33400?
It is getting more and more difficult, and there are risks attached.
However there is the instant 30% tax rebate on VCT or EIS investments.
In theory you could avoid much if not all income tax.
https://www.gov.uk/guidance/venture-cap ... -investors
Please note the web address on my link. If this method of avoiding tax is contrived, then it has been contrived by our government.
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- Lemon Quarter
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Re: Salary exchange and six-figure curse
Urbandreamer wrote:Lynx wrote:Are there any creative ways to deal with the situation of bonus (+savings income) exceeding £33400?
It is getting more and more difficult, and there are risks attached.
However there is the instant 30% tax rebate on VCT or EIS investments.
In theory you could avoid much if not all income tax.
https://www.gov.uk/guidance/venture-cap ... -investors
Please note the web address on my link. If this method of avoiding tax is contrived, then it has been contrived by our government.
I don’t think this works for the OP. The problem he[?] has is that the marginal rate of tax at his income level is >60%. Investing in VCTs or EIS gets (IIRC) a flat 30% tax rebate. It doesn’t alter your taxable income as say salary sacrifice does. That is what the OP needs to do.
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- Lemon Slice
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Re: Salary exchange and six-figure curse
To receive a £40k annual allowance you need at least one of (i) Adjusted Income < £150k, or (ii) Threshold Income < 110k.
Here's a good discussion
https://3652daysblog.wordpress.com/2018 ... nce-taper/
Here's a good discussion
https://3652daysblog.wordpress.com/2018 ... nce-taper/
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