Author Topic: UK tax - High single salary versus splitting between two. Powerful maths.  (Read 1432 times)

edgema

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I was pointed in this direction after posting the above in general discussion.

I am suffering mental contortions weighing up pulling the rip cord too early versus 'just one more year' syndrome. I am thankfully late in the process and pretty close to FIRE. In a nutshell I earn very well, spend more than I should (partly to enable the earnings) and am in a career which is most likely a one-way door when I leave (thus the cost of being wrong is high).

I am trying to consider UK tax as one thing which will meaningfully improve when I stop earning as we will be able to spread our earnings between me and my wife (as equal shareholders in a company we have set up to hold property). I have built a spreadsheet comparing split earnings to a single salary on an after tax basis, mostly to try and make me feel better about a large drop in pre tax income. The numbers are quite powerful.

A single earner on 130,000 gross, who therefore loses their personal allowance and pays 40% tax on a large portion of their salary as well as national insurance seems to be equivalent to earning about 92,000 gross through the company and shared equally. The biggest element of this is income tax which is c.45,000 in the former but just c.11,000 in the latter situation. Both end up as about 80,000 net with some other tweaks related to our situation.

I am pretty sure the numbers are about right, but would love to know if anyone else has benefited from this taxation 'dividend' or has any challenges / comments about the subject.

Many thanks....

marty998

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Re: UK tax - High single salary versus splitting between two. Powerful maths.
« Reply #1 on: September 07, 2017, 05:12:31 AM »
This is quite similar to Australia. There's a massive benefit to having 2 incomes of $50,000 for example, instead of 1 at $100,000.

Of course, the somewhat preferential tax treatment of passive income and capital gains makes this even more attractive from a tax perspective.

TartanTallulah

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Re: UK tax - High single salary versus splitting between two. Powerful maths.
« Reply #2 on: September 07, 2017, 07:48:29 AM »
I've given some thought to this matter along slightly different lines. Financially, would it be worth trying to my working life for another year by cutting down on my work commitment now and working the same number of days split over two years? And the answer is that it would. I'd pay very little higher rate tax each year and my student offspring would become eligible for more financial support. It's purely an academic exercise because there isn't scope for me to reduce my work commitment at present, but I would if I could.

Dividing post-retirement income in a way that minimises our household's tax bill is something we're looking at, and aiming to maximise two lots of tax-free allowance is very much on the agenda.

frugledoc

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Re: UK tax - High single salary versus splitting between two. Powerful maths.
« Reply #3 on: September 07, 2017, 12:16:03 PM »
Are you using your pension allowance.  That's would neutralise most of the difference as you get 60% tax relief 100-122k then 40% above that

edgema

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Re: UK tax - High single salary versus splitting between two. Powerful maths.
« Reply #4 on: September 08, 2017, 05:28:46 AM »
Hi there, yes I have definitely used pension allowances as much as possible during the accumulation phase. Thinking more now about the drawdown phase and whether we can live of the earnings we get from the properties (about 80k for a family of 4). I know most would howl 'of course you can' and they would be right. Just want to make myself feel better that this is actually not a huge drop from the 130k I earn now because of the massively different tax situation.

It is a pretty basic income tax calculation so while I am not a tax accountant I am 99% sure that the maths is about right, but thought I would put it out there to see if there were any. Yes. but what you have forgotten is..... comments!

cerat0n1a

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Re: UK tax - High single salary versus splitting between two. Powerful maths.
« Reply #5 on: September 08, 2017, 09:55:46 AM »
There's too much you haven't said to be able to do a good calculation, but a single earner on 130k gross, PAYE, not living in Scotland, not blind and under the age of 60 would pay 45300 in income tax and 6124 in national insurance, giving a take home of ~ 78.5k. So I believe your calculation is correct.

Obviously, pension contributions will reduce both the take home and the amount of tax paid - you really want to be using the full 40k allowance if possible, provided no LTA considerations. In which case, the amount that you take home (and therefore the amount you need to replace) would be lower.

To produce an equivalent take home pay from 2 earners, you'd need to both earn approx 54k each, each of you would pay 10,296 income tax and 4,604 in National Insurance, giving a take home of 39 100 each. However, that ignores the fact that you both have a tax-free dividend allowance etc., two capital gains tax allowances, the possibility of using ISAs, contributing to 2 pensions etc etc. Furthermore, if you're running this as a business and paying dividends rather than salaries, you can avoid NI & you can offset some expenses etc etc (does the business need to buy a computer or a car?)

I've been in a similar situation for a while - my wife has not paid income tax in ~20 years, but as an employee, no scope for me to do anything about it.

dreams_and_discoveries

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Re: UK tax - High single salary versus splitting between two. Powerful maths.
« Reply #6 on: September 09, 2017, 06:25:36 AM »
Yeah, reasons like this make me dislike progressive taxation.....using two personal allowances, basic rate bands, interest, dividend and capital gains allowances is so much more beneficial.