March 3rd, 2018

How to get an instant guaranteed return of 150% on your money

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This trick won’t be for everyone but it does show the value of keeping a close eye on ‘marginal’ tax rates – and how contributing to a pension can help save huge amounts of tax.

A great example of a marginal tax rate is seen on earnings between £100,000 and £123,000. At this level of income you’re already a higher rate tax payer so can expect to pay 40% in tax. On this level of income you also lose your personal allowance (that’s the bit you can earn without paying tax). You lose £1 of personal allowance for every £2 over £100k you earn. That means the marginal rate of tax on earnings between £100,000 and £123,000 are taxed at a whopping marginal rate of 60%.

Now imagine if you made a net pension contribution of £18,400. This would be grossed up by the Government so your pension would receive £23,000 in total. You’d get higher rate tax relief of £4,600 and save another £4,600 in tax as you would have retained your personal allowance.

Doing the maths you’ve spent £18,400 of cash going into your pension and saved £9,200 in tax right away. That means your net outlay is £9,200 to get £23,000 in your pension. That’s an instant guaranteed return of 150%!

There is a similar marginal rate between £50,000 and £60,000 for people with children claiming the Child Benefit allowance and Child Benefit is clawed back.

And it’s still a positive move for anyone paying 40% in tax. The net cost of putting £1,000 into your pension is £600 – still an impressive 67% return.

A disclaimer – everyone’s circumstances are different so you’ll need to take the advice of an IFA before investing into a pension.

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Freelancers Newsletter Tax Advice Writers


John manages a wide portfolio of owner managed businesses and oversees the smooth operation of the firm’s payroll department.

After obtaining his degree in mathematics from the University of Liverpool, John joined Jonathan Ford & Co in 2004 and qualified as a chartered accountant four years later. John likes to keep abreast of developments in tax and accounting and is responsible for the mentoring of junior staff.

Outside of work, John enjoys powerlifting and is a Liverpool FC season ticket holder.

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