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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Managing Director

Jonathan trained as a chartered accountant with Price Waterhouse (now PWC) in Liverpool before becoming a small business services manager for Grant Thornton in Warrington. He also spent three years as the financial controller for Brookside and Hollyoaks (not that he ever mentions it!).

Jonathan is recognised as a specialist in the entertainment industry and is often called upon to provide training courses and seminars for media professionals. He's also a bit of a technology geek and has been recognised with the accountancy industry as one of the most progressive accountants in the UK.
Outside of work Jonathan is very proud to be the Treasurer of the Tim Parry Johnathan Ball Foundation for Peace and to be on the Council of the Liverpool Institute of Performing Arts (LIPA)

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