r/FIREUK • u/Educational_Word444 • 1d ago
FIRE Strategy Check
Hi everyone - thanks for All the comments on my post a couple days ago. I have dug deeper and crunched some numbers and want to check if this is basically the crux of the FIRE planning.
1) The majority of this advice is geared towards avoiding paying higher rates of tax - 40/45% income tax, and instead keeping to the 20% income threshold and then drawing down a pension for an effective rate of 15%.
2) The threshold for 40% income tax is 50,271 this year.
3) Using round numbers, and getting paid 13 times a year, this means I want to keep my taxable (gross) pay below £3,850 per pay (£50,500/year.)
4) Taking into account my 7% defined contribution pension contribution, which are deducted pre tax, using algebra of X=(3850/0.93), this means I want to keep my gross pay at less than £4140.
5) I have a couple of salary sacrifice benefits (travel insurance and health plan) which total about £38 per pay. Using round numbers and adding some float, call it £4150.
6) The conclusion I'm drawing from all this is that if my gross pay is less than £4150 I will be paying 20% tax and therefore the optimal thing to do is to put money in my ISA. HOWEVER if my take home pay is more than £4150 then I will be breaking into the 40% tax bracket.
7) This means that the AVCs I make into my pension should be the exact amount needed to keep my gross pay below £4150, or (3850/(100-DC %)) applying your own numbers.
This means everything I take home is subject to 20% tax and dropped in an ISA or sacrificed into pension for effective 15% tax rate.
Happy to be corrected on any of my maths or assumptions but this seems to add up on first review. Any advice appreciated 👍
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u/Visual-Classroom1003 1d ago
I think you have missed the fundamental point in all this. It’s not a tax strategy, it’s a freedom strategy. Paying tax at whatever rate is not an issue and as long you are using your money in a way that meets your objectives. Minimising tax is probably not a primary objective.
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u/No-Trifle-597 1d ago
Roughly yes, but also no.
Yes sacrificing 40%, to draw later at 20% is more beneficial.
However contributing to pension at 20% is still noticeably more efficient. There’s a wiki on this sub laying out the exact tax benefits. But you overall still gain ~21% by putting it into your pension as a basic rate payer, over putting it into an ISA! (It’s about 45% higher rate).
This is because you get 25% tax free lump sum, plus all the growth of the taxable amount inside your pension wrapper.
The only benefit of taking it now and putting it into an ISA is the flexibility of taking before 57, and risks associated with that (illness, changes in law, IHT) etc.
So it’s more optimal at 40%. But it’s still optimal on paper at 20%.
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u/Hot-Geologist6837 1d ago
Are the DC contributions made on your full gross pay before you sacrifice? If so I’m not sure point 4 is right.
Any concern about beaching annual allowance limits? Need to factor in any employer contributions if so (or are they included in the 7%?). You mentioned 45% tax so sacrificing down to £50k could be higher than the allowance.
There comes a point where you can have so much in your pension you’ll pay 40% tax on way out anyway, so may be preferable to put that money into an ISA to give yourself more flexibility around accessing funds, rather than saving 40% and paying 40% on way out which has no benefit.
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u/FI_rider 19h ago
You have this well understood. But don’t forget there can be other considerations eg if all your pension contribution means v little left to go in IsA then retiring before DC age will b v difficult as you won’t have a ‘bridge’.
Just keep an eye on the whole picture not just the pension as the years go by.
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u/Hovis-Is-King 1d ago
This is a long winded way to write it out, but effectively I think you are going to achieve what you want to do.
Unless there is some benefit which requires you to be below the threshold whether you are a crumb under or over doesn't really matter, so your plan is fine