Charitable giving above £100k

[Umar]

Hi

I earn £130,000 salary.
I give away £10,000 in charity each year.
Personal allowance I know is £12,500.
I don't want to suffer the 60% marginal income tax rate above £100,000, nor have to submit self-assessment.

How much do I need to put into my pension such that I don't suffer the marginal rate?

I guess it is either £20,000 or £30,000, depending on how the £10,000 is treated.
Any advice greatly appreciated - thank you!

[D&C]

Earning more than £100k means there is no way you can avoid Self Assessment (from what you have posted I'm assuming your P60 will show taxable pay of £130k).

Sadly your post is a bit short on detail.

Is the charitable payment done through Gift Aid?

If so is the £10k net that you actually paid or the grossed up figure including the basic rate tax relief the charity claims?

What method are you using to make the pension contribution?

There are 4 main types and they all work in different ways.

Net pay i.e. through payslip before tax is calculated
Relief at source i.e. to a personal pension or SIPP where the pension company adds basic rate tax relief
Salary sacrifice (this is really your employer contributing in return for you agreeing to a lower salary)
Lump sum payment with no tax relief whatsoever at point of payment, typically made to a public sector scheme

Finally your Personal Allowance is based on adjusted net income and other income will impact it even if that income is due to be taxed at 0%. Do you have any interest, dividends, company benefits, rental income etc to add to the £130k salary.

[Umar]

Understand. Let me start again, including the extra information.

I earn £130,000 salary and no other income.
I give away £10,000 in charity each year, via Gift Aid. The £10,000 is the net I give away.
Personal allowance I know is £12,500.
I don't want to suffer the 60% marginal income tax rate above £100,000, nor have to submit self-assessment.

How much do I need to put into my pension, via Salary Sacrifice, such that I don't suffer the marginal rate?

I guess it is either £20,000 or £30,000, depending on how the £10,000 is treated.
Any advice greatly appreciated - thank you!

[D&C]

As your P60 will show income in excess of £100k you cannot avoid completing a Self Assessment return.

Your adjusted net income as things stand would be £117,500 (£130k from your P60 pay less £12,500 (gross) Gift Aid payment).

So if you sacrificed £17,500 of your salary it would reduce your P60 taxable pay figure to £112,500. Less the gross Gift Aid of £12,500 would give you adjusted net income of £100,000.

When you complete your Self Assessment return you would retain your Personal Allowance but your taxable income (as opposed to your adjusted net income) would remain £112,500. Your basic rate tax band would however be increased from £37,500 to £50,000 courtesy of the gross Gift Aid contribution. Reducing the amount of higher rate tax payable.

Note you do not get any pension tax relief from salary sacrifice, this is because the pension contribution is an employer contribution. The tax saving for you comes from not having £17,500 to pay tax (and National Insurance) on in the first place.

It is fortunate that you have a pay date so close to the end of the tax year and an employer flexible enough to be able to implement the salary sacrifice on the penultimate day of the tax year. I suspect most people have received their final pay of the tax year by now.

[Umar]

Thank you. Just to make sure I understand properly

- the requirement to submit self-assessment is based on "Taxable pay", which would be £112,500 per the above?
- I would only be taxed on the "adjusted net income" of £100,000, thereby not getting hit with the 60% marginal income tax rate?

Just checking as I did think the self-assessment allowed you to deduct charitable donations.
(I'm not doing donations to avoid self-assessment! But it would be a nice side-benefit to save me some time!)

Again, thank you!

[D&C]

Not quite. I think the requirement to have to file a Self Assessment return (in this scenario) is having taxable income in excess of £100k. It could be taxable pay of £90k and some other income, not just taxable pay itself.

Adjusted net income is totally different to taxable income. Your Personal Allowance is based on adjusted net income but your taxable income remains £112,500 and you will be taxed on £112,500.

But your GIft Aid contribution increases your basic rate band from £37,500 to £50,000 so you pay 20% on an extra £12,500 instead of paying 40% on it. So although the charity has ended up with £12,500 it has only really cost you £7,500 (£10,000 paid to the charity less £2,500 tax saved by paying more 20% tax and less 40%).

I suspect completing your Self Assessment return will take far less time than trying to explain everything to HMRC would.

Once you have filed your Self Assessment return HMRC will probably assume that you will make a similar Gift Aid donation in the 2020/21 tax year and adjust your 2020/21 tax code to reflect that assumption. That change to your tax code is not allowing any tax relief for 2019/20 - that is all given via your Self Assessment calculation (SA302). So if you don't plan on making a similar charitable payment in 2020/21 you would want to get your tax code adjusted back otherwise you will owe a chunk of tax for 2020/21.