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Where Taxpayers and Advisers Meet

Untaxed Income going above £100,000 (£122,000)

DtheRed
Posts:20
Joined:Thu Oct 05, 2017 5:35 pm
Untaxed Income going above £100,000 (£122,000)

Postby DtheRed » Thu Jan 24, 2019 2:48 pm

Hi all,
Grateful for some advice/views. I pay tax via self assessment. For next year only, due to maturity dates of bonds i have held for years, my untaxed income will shoot up to £122,000 instead of the usual £55,000. I understand that without any mitigating action this means I would lose my personal allowance and in effect be subjected to 60% tax for my income over 100,000!

My questions are:
1) Is there a way to maybe pay into a SIPP or something similar to drop back under 100,000 and keep my personal allowance?
2) Are there any other consequences of dipping over 100,000 such as changes in tax bracket/greater HMRC scrutiny/tax code issues? You see I have an option of deferring about £30,000 of the income to the FY after (dropping me to about 90k) but it will cost me about £5000 in penalty fees to do so. Would that be preferable to the SIPP route (if that is indeed a route)?

Thank you,
D

robbob
Posts:3228
Joined:Wed Aug 06, 2008 4:01 pm

Re: Untaxed Income going above £100,000 (£122,000)

Postby robbob » Thu Jan 24, 2019 4:09 pm

Yep it should be as simple as chucking 80% of the excess into a pension - providing you don't have any specific restrictions in this regard (which you may have !)- this will be grossed up to 100% of the amount with the added tax relief.

Note you are restricted to the "level of earned income" in that year - so it may not be possible if you don't have earned income up to that level.(being level of gross pension payments made)
You can be restricted to 40k under some circumstances with regard to adding to your pension or pension performance if its a NHS type pension - its tricky advising full details of how the limits work and when.

finally there can be further restrictions if your adjusted income is over 150k or threshold income is over 110k
https://www.youinvest.co.uk/sites/default/files/AJBYI_Guide_to_annual_allowance_tapering.pdf

i am presuming there are no other pension related restrictions - lifetime earnings or similar.

Based on you having 122k income including earned income of at least 22k and no other pension payments or issues - then chucking 17,600 into pension would do the job of paying no 605 tax (pa kept in full) - presuming no other pension items that should be level below which you have any problems with "adjusted" or "threshold" income calcs.
2) Are there any other consequences of dipping over 100,000 such as changes in tax bracket/greater HMRC scrutiny/tax code issues? You see I have an option of deferring about £30,000 of the income to the FY after (dropping me to about 90k) but it will cost me about £5000 in penalty fees to do so. Would that be preferable to the SIPP route (if that is indeed a route)?
Minor annoyances
Your tax code for future years will likely need manual change back to get perosnal allowances back
tax returns mandatory
tax deducted at source may be too much or too little if code is wonky and in yera you go over you will likley owe a wad of tax

Each to their own route wise - but SIPP is tax advantageous unless you are likely to higher rate taxpayer at retirement and penalty fees are lost cash - so avoiding "minor annoyances" and keeping it tax efficient whilst not incurring any penalty fees would seem tempting to me

DtheRed
Posts:20
Joined:Thu Oct 05, 2017 5:35 pm

Re: Untaxed Income going above £100,000 (£122,000)

Postby DtheRed » Thu Jan 24, 2019 4:24 pm

Thanks Robbob!

So if I put the excess over 100k into a SIPP to bring it under 100k, would that prevent the 'minor annoyances' occurring too?

And does bank interest and bond interest count as 'earned income'?

Cheers,
D

robbob
Posts:3228
Joined:Wed Aug 06, 2008 4:01 pm

Re: Untaxed Income going above £100,000 (£122,000)

Postby robbob » Thu Jan 24, 2019 6:29 pm

does bank interest and bond interest count as 'earned income'?
No - unfortunately not - that income just comes to you - you don't really have to get out of bed to earn that :)

Normally its employment - self employment and the like - further details here

https://www.rossmartin.co.uk/private-client-a-estate-planning/income-losses-claims-reliefs/1034-relevant-earnings-for-pensions-purposes

DtheRed
Posts:20
Joined:Thu Oct 05, 2017 5:35 pm

Re: Untaxed Income going above £100,000 (£122,000)

Postby DtheRed » Thu Jan 24, 2019 8:03 pm

Darn it!

Well that makes sense, and I am sure you are right (as also confirmed on the link you sent). But, after posting my earlier question, i logged into my SA and pretended to amend it (before cancelling) - just to see the calculation using hypothetical figures...

I put my income down as £122,000 foreign bank interest, and stated I paid £25,000 into an authorised pension scheme. My calculation showed not only that I got my personal allowance back but also that the site had automatically increased my 20% threshold by 30,000 to compensate for the the 40% tax bracket (allowing me to get the full 40% pension relief).

Does this mean the pension scheme themselves monitor eligibility or that HMRC will adjust it or that foreign untaxed bank interest is considered 'earned'??

Confusing!

robbob
Posts:3228
Joined:Wed Aug 06, 2008 4:01 pm

Re: Untaxed Income going above £100,000 (£122,000)

Postby robbob » Thu Jan 24, 2019 8:30 pm

Does this mean the pension scheme themselves monitor eligibility
Not to my knowledge? although some may do?
or that HMRC will adjust
No - don't be silly :)
it or that foreign untaxed bank interest is considered 'earned'??
No

Nope that would all be too sensible

HMRC allows someone to make an innocent mistake and claim pension relief they aren't eligible too - they will likely then wait 3 1/2 years and give you a hard time with some penalties and interest to boot :(

The clue is in the name "self" - you must do it correct yourself - never presume hmrc will keep you right

DtheRed
Posts:20
Joined:Thu Oct 05, 2017 5:35 pm

Re: Untaxed Income going above £100,000 (£122,000)

Postby DtheRed » Fri Jan 25, 2019 7:07 pm

Well that's disappointing! So i can fill all the boxes accurately and still get the blame!

Thanks Robbob


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