I was reading an article on the dreaded Brexit the other day – it’s still hard to read anything that doesn’t refer to it – about the hotly disputed claims over the amount of weekly money going to Brussels that could go the NHS. Cutting through the chaff and spin, the main point was that those Big Bad Brexiteers quoted a gross figure, not net.
Well, the last time you quoted your salary, or an employer quoted one to you, what figure was used? Gross or Net? Daft question, isn’t it? On salaries, everyone quotes gross. In this way, a gross number has some sort of legitimacy and credibility, even if it has a long distance relationship with the “bottom line”.
When I stop working I won’t have a salary of course, but I will have a pension, including one from the State which is probably going to be around £8,000 a year. But – is that gross or net? That depends on (a) what other pensions and income I’m taking and (b) how I choose to look at it. Worst case scenario, the government will give me £8,000 with one hand and then take 40% of it back with the other. In a real horror scenario, they might take 55% of it back (as I understand it) although that could be quite a nice problem to have as your pension pot will then be north of a million quid.
The subject of pensions and taxation is one that lingers on the periphery of many dialogues I have with myself on retirement income. It’s on the periphery because I often just don’t allow it in to the inner circle of my calculations on the basis that it’s an uninvited guest who I may, or may not, ask to join the party. However, if I cannot totally exclude the taxman from the party, I assume I will be doing everything to minimise his presence. It’s just that I’ve not yet really dug into the detail of how I do that.
I once constructed a spreadsheet that did factor in the knowledge I thought I had about the tax situation in retirement for both my wife and myself. It soon became an unwieldy, over-formatted monster that included so many “ifs and buts” it threatened to crash my computer. Needless to say, I haven’t opened it since I thought I’d finished it. Instead, exhausted by scenario planning, I told myself, “Keep it simple”. Stick to the big things you do know and, if you have those correct, you’ll not make any massive mistakes.
What do I think I know about tax and pensions? Firstly, the big tax free bonus that applies to me is that I can currently take 25% of any pension pot tax free when I hit 55. For my Direct Contribution pension that’s a simple calculation. Secondly, when it comes to income tax, both myself and my wife can withdraw up to £11,850 a year tax free which, when you tell yourself that’s a net number, is quite a substantial amount. What gross salary would you have to earn to take home, after tax and NI, an income of £23,700 a year? I can’t be bothered doing that calculation (because I’m frightened I will get it wrong) but it must be close to thirty grand, which is above the national average wage. Anything you add on top of that is cream on the cake, taxed or not.
Perhaps, if I left things at that, then I’d have a much more relaxed and stress free life. Unfortunately that’s not the way I’m made and, I think, I didn’t get where I am today by letting my money take care of itself. You have to work on your cash to ensure it’s working for you. Plus there’s the whole question of getting value for money when you spend it – after all, isn’t that why we work to earn it? At some point you have to choose to spend and, when I do, I want to ensure I gain maximum value at the point of withdrawal to give maximum value at the point of purchase. (I also give myself a hard time about mulling over “First World Problems” like these, but that doesn’t change anything except my mood and level of guilt).
I’ve already become lost in various forum threads that try to answer the question of how best to withdraw retirement funds in a tax efficient way. There are a lot of strategies because just about everyone has a different set of circumstances that apply to them. In a way, it reminds me of those examples newspapers always run post-Budget that take a variety of households and calculate “Here’s how the budget will affect you”. In all the years of reading them, I’ve yet to find one that actually applies, a hundred percent, to me.
As ever, when it comes to personal finance, a good outcome will probably be related to the amount of work put in. I could pay a professional to give me some pointers but, with those fees running into potentially thousands of pounds, I doubt I’m ever going to do that.
It would be easier, and possibly saner, to just plan to live on £23,000 a year net, with any excess sitting there as an “Emergency” or “Fun Fund” to be called on as necessary. In a lot of ways, I really like this idea. It’s really simple. I just can’t shake the feeling that it’s also really dumb, as I worked hard to save the money that I’ve accumulated, telling myself that one day I’d be able to enjoy it. I just don’t think it’s a sensible option now to sit and watch the pile grow. For what?
So, in lieu of any other great ideas, it’s back to the financial grindstone of the forums and blogs, and the never-ending debate about what to do for the best.
sex health money death 
I don’t think many people can understand that current salary = living expenses while working + tax + NI + mortgage + saving for retirement is >> living expenses when retired, when tax is minimal, and mortgage paid off. “You can’t possibly live in London earning under £100k, daaarling”.
By careful of use of personal allowances, dividend and interest allowances, I think a couple should be able to get a combined £30k a year and pay minimal tax while not working.
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An Ifa at work the other day talked me through this and seemed to be closer to 50k at least initially taking in to account your 11k plus your tax free 25% assuming you don’t take it all at once
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Don’t sweat the little things. Heaven knows what tax regime a Corbyn government might bring. Now that could be worth sweating over for those of us who are supposedly wealthy.
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If only our politicians addressed the amount of tax that corporations and the extremely wealthy manage to avoid by using offshore tax havens, then there would be no need to increase taxes on the “supposedly wealthy”.
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I see the Shadow Chancellor berated the big 4 accountancy firms this week saying that their duty was to maximise the amount of tax their clients paid. This doesn’t bode well for the economy if Labour get into power, as I’d rather have politicians who lived in the real world.
Tighten up the tax code, yes, but don’t equate avoiding tax, which we all strive to do, with evasion.
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Money is a state of mind, once you I realised that I could have everything I want in life on the tiny income I have right now I mentally relaxed and started to enjoy life rather than chasing an ever larger “pot”.
I would always use net income as a comparative because the net income from £50k gross to an employee with no company car is different to £50k gross to an employee with a company car, is different to a single director company with £50k of net profit maximising the tax advantages of dividends is different to a sole trader with a turnover of £50k – same gross, different nets and the only thing that really matters is the money you take into your house
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The unintended irony of the blog makes an occasional read worthwhile. In one post the blogger schemes to pay no tax. In another post he worries about the future of the state pension and the NHS. Priceless, typical Daily Telegraph reader stuff
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… and therein lies one of the fundamental reasons why we are in the mess that we are in, that the very notion that taxes are a bad thing and we should do all we can to avoid them.
In a shared world, taxes are necessary to pay for the services that we need for society to function. We are now seeing the effects of putting less and less money into our public services (and in terms of the NHS here, “less and less” is measured against the demand in real terms not the absolute value).
So what needs to change? Well, we need to change our mind set and accept that we should all pay our fair whack of taxes. The problem here is that many will see others paying less taxes and say that’s not fair, so we get a race to the bottom in terms of who can avoid the most taxes.
Secondly, government needs to make it harder for companies and the super wealthy to avoid taxes. This is always going to be never ending chase with accountants devising up new schemes to replace ones being closed.
Neither of the above is easy to accomplish and will take time. But to do nothing is just as culpable.
I don’t agree that doing either of these will destroy the economy as has been suggested if Labour get into power. The current government seems to be doing a good job at that with its Brexit ideology at the moment. But not doing it will lead to greater inequality and worse and worse public services and that is the true cost of tax avoidance.
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I agree with every word accept the last one. Can we please remember that tax avoidance is legal, tax evasion is not, in spite of the media trying to relabel the former.
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I think the general consensus is that the UK is pretty much a tax haven if you want it to be, certainly for retirees?
Possibly not quite so true for PAYE salarymen as options there are more limited, especially if you live pretty close to the wire in terms of spending what you earn.
Come on NL, we all transpire to avoid tax while at the same time professing a profound love for the NHS, and *everyone* will be outraged if the state pension goes? No requirement to buy a copy of the Telegraph?
..the ability to hold two opposed ideas in mind at the same time and still retain the ability to function and all that..
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Having transitioned from PAYE to Ltd, I can concur with your second paragraph; I have the utmost sympathy for anyone in PAYE, as it is, by far, the most draconian tax regime of the lot!
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I fully understand the difference between tax evasion and tax avoidance with regard to the legality. But I do think that legal tax avoidance by the large corporations and extremely wealthy does have a negative impact on the amount of money available for public services. On that basis, the government can and should do more to reduce the benefits of tax avoidance for this set of corporations/individuals.
I do believe that here is always a place for the government using tax incentives (tax avoidance to the end user) to benefit society as a whole. The use of tax relief for pension contributions is a good idea as it encourages the private provision of pensions for later life. Tax avoidance vehicles such as ISAs are also a good idea as they encourage saving.
But there is clear difference between this kind of tax avoidance (ISA etc) and the deliberate creation of offshore vehicles and the use of transfer pricing to reduce the amount tax that needs to be paid in a particular location. All this is perfectly legal but it doesn’t mean that it is fair for society.
And that word “fair” is at the nub of the problem. Everyone will have their own interpretation.
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So would you be happy for your investment returns to diminish as all the worlds global corporations paid more in taxes locally around the world? Corporations owe it to their shareholders (us readers of this blog) to maximise profits and hence dividends. A big global clampdown on tax evasion/avoidance by corporations will have a devastating impact on stock markets globally. So how do we square the circle of seeing ourselves benefit from the tax avoidance/evasion/efficiency of the companies we own whilst seeing our libraries shut down and our paramedics paid shit wages?
I may grumble about my shit pay rises as a teacher but we try to live on our tax free income and we tuck the rest away in lifetime ISAs and SIPPs thereby getting our income tax repaid into these accounts. I am actively trying to pay no tax whatsoever whilst whinging about the decimation of public services…a tad hypocritical I know….
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Well if corporations paid more in taxes, then there would be more money for public services and quite conceivably income tax rates for mortals could be reduced which would be better for us mortals.
There is obviously a bubble in asset prices and that has partially been caused by corporations not paying their fair share of taxes, as they channel that money into paying dividends to their shareholders.
If it meant less inequality, then yes I would accept diminishing returns from my investments. But I believe it would benefit society as a whole. Corporations still have that duty to maximise shareholder returns, but governments have a duty to the creation and maintenance of a fair and civilised society.
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@Doctor – “But I do think that legal tax avoidance by the large corporations and extremely wealthy does have a negative impact on the amount of money available for public services. ”
Why do you think that, where are the numbers? Do you have a handle on any figures, or is it just a gut-feeling?
Thats what we always need, some really impartial, well presented information that quantifies that impact so we can decide if its a problem or not? Otherwise its just random people saying, ‘I think this’ or ‘I think that’..
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This is not just a gut-feeling. Here is a paper from the Institute for Fiscal Studies from 216 regarding BEPS (Base Erosion and Profit Shifting). This multinational tax strategy of price shifting is not included in the governments figures of what it considers as being avoided, partly I think to keep the numbers as small as possible (and reduce public alarm) and partly because it is very difficult to quantify.
The IFS quote the TUC’s estimate as £12bn per annum for the top 700 companies in the UK, but accepts this could be a under-estimate or over-estimate of the true figure. Whatever, it is not an insignificant sum.
Click to access gb2016ch8.pdf
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ah – good stuff! I’ll take a look..
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peer2peer could give you £6k from 100k, at higher risk.The Starting Rate for Savings is odd, it claims its reduced if you have higher ‘non-savings income’, but dividends are not considered to be ‘non-savings’.
On 29 January 2018 at 14:35, sex health money death wrote:
> The Rhino commented: “ah – good stuff! I’ll take a look..” >
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Anyway, getting back to the original blog…. 🙂
In 2018/19, one could earn £11,850 from a pension, £6,000 from savings and £2,000 from dividends without paying tax. That’s a total of £19.850. For a couple that’s a whopping £39,700.
OK, it can be tricky to do, as you would need about £300,000 in interest bearing savings (could include bond funds paying interest) to get the £6,000 at a rate of 2%. The £6,000 is made up of your £1,000 personal savings allowance and £5,000 starting rate.
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Plus an infinite amount in theory from ISAs. Thing is, once lots of people do that, it isn’t sustainable is it? One vote in parliament and any one or all of these numbers change or disappear
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With £20k/pa/person ‘normal’ people could expect to shelter all their savings/investments, apart from perhaps a 10 year window after they inherit the proceeds from an inheritance house sale. And during that period a couple might get 3.5%*400000*10/2=70k in dividends, and pay 7.5% tax on £30k of them, £2250 tax, which is not a lot.
So the Treasury must assuming the tax take from savings/investments is now minimal, and expect to get it all from salary/pensions (and VAT etc)
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question is will lots of people do it though?
is there any data on the average ISA savings rates?
take up might be lower than you think?
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Ahh should have carried on reading g yes this was it
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@FBA – did you just leave a comment on TEAs ‘Nice Guy’ post? I can see it on the recent comments section on the right, but no sign of it in the actual comments section? Not another mysterious disappearing comment?
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don’t forget £11,300 CGT allowance?
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I find that tax rules change infuriatingly fast, but I thought currently there was a dividend allowance of £5000 and a savings allowance of £1000? therefore you could add £6000 to the personal allowance before paying any tax, per person. This is different to some of the figures I see quoted above, has it changed again?
With regard to the “if everyone used ISAs, we’d all pay no tax” line of thinking, there was a recent article (I can’t remember where from, I probably came across it from Monevator) which stated from a recent survey 43% of people had less than £1,000 savings. I doubt we will all be living tax free off ISAs any time soon?
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It is pretty mad… that dividend allowance is coming down to 2k I think and the 1k saving allowance is only for basic rate taxpayers. Its not super-simple. Not sure where doctor got his 6k figure for savings allowance from?
Its so complicated, you rarely see anyone getting it right in the blog comments sections. The bit that always gets me is although the allowances are tax-free, you can’t disregard them as they still count towards your tax band..
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See https://www.gov.uk/apply-tax-free-interest-on-savings
“Starting rate for savings”
You may also get up to £5,000 of interest tax-free. This is your starting rate for savings.
The more you earn from other income (for example your wages or pension), the less your starting rate for savings will be.
If your other income is £16,500 or more
You’re not eligible for the starting rate for savings if your other income is £16,500 or more.
If your other income is less than £16,500
Your starting rate for savings is a maximum of £5,000. Every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1.
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Note for the SRS its ‘income’ that reduces things, this does not include dividends, as I found in the Self Assessment website, despite confusing wording in other docs.
On 4 February 2018 at 19:33, sex health money death wrote:
> Doctor commented: “See https://www.gov.uk/apply-tax- > free-interest-on-savings “Starting rate for savings” You may also get up > to £5,000 of interest tax-free. This is your starting rate for savings. The > more you earn from other income (for example your wages or pensio” >
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@D and JB – always remember, tax doesn’t have to be taxing!
Cheers for the additional info..
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@Doctor you have too much faith in the world!! ☺
Most politicians couldn’t give a s**t about a fair and equal society. They just see their years of public service as a fast track to the corporate or EU gravy train. A problem endemic across all neo liberal governments from thatcher onwards, red or blue, is that no one is prepared to shakedown the corporations for extra tax dollars as that would lose them the chance of a place on a board somewhere…
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@QTB, I agree with what you say about politicians. This will not be tackled overnight. It will be a long fought battle with no guarantee of success. Transparency is a good first step. Public attention on the likes of Starbucks, Apple and Google has had some impact, but there is a very long way to go.
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