Hi,
Just registered with MMM, and keen to share some discussion. This might be a bit heavy for a first post, but here goes...
Let's say you take advantage of the UK rent-a-room rule as a side earner and that provides you with a nice £7500 additional tax-free income a year.
Let's say you've already paid off your mortgage, have no debts and living frugally, and already embrace living within your means and saving/investing. This nice additional income can really help accelerate path to future financial security.
But how would you best us it? Where would you invest it?
Tell me if this sounds a bit crazy...
Me, I would live off the income from the rent-a-room while at the same increasing the pension contribution from my regular job to the amount where my net income is then reduced by an equivilent £7500/year to take advantage of the income tax relief on pension.
So for someone on £40k gross salary making 0% pension contribution their breakdown would look like this:
£40,000 gross
£5628.2 income tax
£3789.12 NI
---
£30582.68 Net
However if they put 23.5% of the gross salary toward their pension, their numbers now look like:
£40,000 gross
£3,748.20 income tax
£3789.12 NI
£9400.00 Pension
---
£23062.68 Net
Note that they are now able to shield £1880 (ie £5628.2 minus £3748.2) from the tax man from the income tax relief.
Add back the £7500 from the rent-a-room to the lower £23063 net pay and you are back on the same pay that you had before, but now they have a very healthy £9400/year going towards their pension.
What do you think? Is that a smart use of the extra cashflow, or is that taking the idea of delayed gratification too far??