reducing tax on second job (over £100k base)

[maxthepolarbear]

I am fortunately enough to be earning £100k pa base in my full time job which I pay tax via PAYE. I will get a bonus of around 30-40% on top. So far I have been avoiding the 60% tax by paying into my pension. I'm close to maxing out the annual allowance.

I have started a second job recently doing some ad-hoc project works as a self employed contractor. My estimated income from this job is probably around £5k-£6k a year. This is steady work that I expect I'll be able to get every year for the next three/four years say (each year earning £5-£6k).

I am wondering whether it is worth setting up a limited company bearing in mind I don't earn much in my second income and the cost of running a limited company (although I can limit the cost by doing the accounting myself as the accounting will be very simple with few income/outgo). The only reason I am considering this is that I see no other way to avoid the 60% tax. With a limited company I could either leave my second income (after tax) in my company and then wind it down in a few years time or I could take money out by paying my partner dividend.

Are there any other more tax-efficient ways of doing this?

[SteLacca]

At some point you will still have to extract profits from the company, and so would be simply delaying the inevitable, as well as paying corporation tax in the meantime.

[Oldtramp]

If you don't need the income (and you imply you don't by suggesting you could roll up in the company) then set up a SIPP, ultimately taking the 25% tax free lump sum and drawing the rests as income when you're in a lower tax band. Needless to say, this approach is more attractive if you're in your late 40s or 50s and potential drawdown isn't decades away.

[someone]

I assume you are aware but make sure you're including any employer contributions in your 40K annual allowance and remember that they count towards the 150k threshold where pension tapering takes effect. The effective tax rate once you reach that point is

If your employer is making pension contributions then your tax rate can reach 80% (possibly 90%) once you cross the 150k threshold as your employer pension contributions in excess of your annual allowance are taxed at your highest marginal rate. So delaying income via a company can make sense even when the costs appear quite high.

It is frustrating that these penal tax rates apply where one person of a couple earns very much more than another.

Two people on 80K paying max pension contributions via salary sacrifice will be basic rate tax payers. One on 160k and one on zero will be losing part of the remaining 40k annual allowance. The former pay roughly 18k tax plus NI, the latter roughly 50k.

But I can't see the government softening its stance. If anything I'd expect them to try and force more married partnerships to attribute all the income to one spouse and none to the other. So what might work now might not work in a few years time.