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They don’t tax free time

Hamster on a wheel: At least he doesn’t pay income tax

This is a bit of a meandering and personal rant. Feel free to skip it!

A new year, a wobbly stock market, and naturally a young not-so-young investor’s thoughts turn towards topping up his SIPP.

And as I pondered how big a lump sum to shock and awe the boys down at Hargreaves Lansdown with, two factors came to mind:

  • From April, dividends will be taxed more heavily.
  • Pensions are going to be revised again in the March Budget, too, and it’s unlikely that Monevator readers’ many sensible suggestions will be in the driving seat.

I’ve been self-employed for most of my working life, but I’ve only been set up as a Limited Company for about a third of it.

And to be honest, my earnings have only really been big enough to make much difference how I paid myself for the last four or five years.

(Before then I was mostly on borderline artist-in-a-garret rates, at least compared to my conventional London friends).

Now if I do nothing from April, the new dividend tax rates mean my tax bill will be around £2,000 higher than it would have been under the old system – thanks to a 6% rise in my effective tax rate.

We debated whether this was fair when the change came in, so let’s put that to one side.

What interests me now is how I find myself responding.

Fund-a-mentally

I’ll say right away that I’m not a very money motivated person.

That might strike you as an insane comment to make, given that I run a personal finance website and spend half my days clucking over my ever-growing nest egg.

But it’s sort of true.

I’ve never followed any line of work for the pay check, really (as my employers from my 20s would no doubt gleefully confirm).

And I don’t spend much money, either.

In fact I probably look like a bit of disaster to some of my peers.

What matters to me is freedom to do what I like – or more accurately to avoid doing what I don’t like.

That’s why I am self-employed, and why I far prefer to work from home.

It’s also my motivation for investing: I find everything about conventional work suffocating.

I don’t want a freedom fund or even a f***-you fund.

It’s more like a survival fund for me.

You’re having a half!

Given my ambivalence towards slaving away for mere money, taxation is a vexing issue.

Without wanting to get political (my post-Thatcher reflections were a better place for that, or even – contrarily – my lament about income inequality) I’m happy paying roughly 20% or so in income taxes.

And I guess I can live with 25-30%.

Any more tax than that and I strongly suspect I’m just supporting other people’s lifestyle choices, rather than the essentials of State and a worthwhile safety net.

Unfortunately, add together corporation tax and the new dividend tax and I will be paying an effective 46% tax rate1 on any income over £43,000 or so – and in reality I’ll be paying it well before then, given my portfolio still has unsheltered savings, bonds, and equities outside of my ISAs and SIPP, where any cash returned will register as income.

Now £43,000 might strike some of you as a lot of income, depending on how and where you live.

But trust me it’s very mediocre among my peers in London.

Yet striving to boost my income – only to hand over almost half of the extra to the Government?

I find the thought pretty demotivating.

Confused future pensioner

One obvious solution is to direct all the would-be higher-rated income into my SIPP instead.

As I say, I’m not in the mega-earner category or anything like it. So this could effectively shelter (or at least postpone) a good swathe of my income from the new dividend tax meat cleaver.

But sadly, that’s where those upcoming pension changes start to worry me.

Could George Osborne bring in new restrictions, or even retrospective measures?

It wouldn’t surprise me at all.

Friday’s off – tax-free

I have plenty of other thoughts swirling around about all this.

For example, it makes clear yet again how much better it would be to own my own home from a tax perspective.

While I desperately try to grow my investment portfolio as tax-efficiently as I can and to keep manageable the tax take on my income that after all has to pay the rent, my friends who own their own places see their (lottery winning) tax-free capital gains roll up year after year after year.

Of course they’re not paying tax on the imputed rent element of their home equity, either.

And then they bewilderingly declare that their £750,000-£1 million property is not a financial asset, just to further annoy me.

Home ownership in this country really is the killer tax break that keeps giving.

But with London prices having moved from extreme to insane to “oh, so this is what my grandmother meant when she said flinched at 50p for a bag of chips that used to cost a ha’penny”, that’s for another day.2

No, I’m thinking I should simply forget about earning more money.

Instead I could keep my lifestyle costs low and pay myself with free time.

Yes it will delay financial independence by a few years.

But given the upcoming tax whack and the unsheltered assets I’m already struggling to tuck away into ISAs each year, not by so much as it might.

And best of all?

They don’t tax free time.

(Yet.)

Note: Thoughtful responses about how you personally address these conundrums very welcome, but ad hominem attacks declaring that since I earn more than you or your cousin Nigel I should be happy I don’t pay 80% tax rates will probably be deleted.

  1. Note: 46%, NOT 52.5%. The combined corporation tax and income tax rate for a higher rate tax payer is 20% corporation tax plus (80% of 32.5%) on the dividend, which equals 46%. []
  2. Or another country. Or another part of the country. Either would help deal with the income issue, too, in that I’d almost certainly have to earn less. []

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{ 67 comments… add one and remember nothing here is personal advice }
  • 51 gadgetmind January 9, 2016, 2:26 pm

    I’m dropping to a four day week as of April. As a result, I avoid pension annual allowance taper, avoid the personal allowance claw back, and as a result can put £10k more into my pension and pay £20kpa (yes!) less tax than I would for a five day week.

    These measure were brought in to raise more tax. They will achieve the exact opposite.

  • 52 The Accumulator January 9, 2016, 4:43 pm

    Signals from the Treasury are for the end of higher rate relief not retro taxation on pensions or some other massive clawback which would probably amount to a ‘university tuitions fee’ moment for a Tory government.

    Now’s the time to be stuffing your SIPP to the max not worrying about phantoms.

    You’re used to taking a punt, I still think this one is worthwhile. The balance of risk for any government tilts towards making pensions look even less appealing than they already do. Fashionable as the talk of wealth confiscation is, I don’t buy it.

    Most of the tinkering with pension tax has been to find ways of reducing the relief that already goes to the well off. colitically unjustifiable since 2008.

    Ever since those seismic events we all knew we’d be taxed more heavily to pay for it. And so we are. But the personal allowance has gone up and the savers allowance is about to come in. Spend as close to that margin as you can and dunk the rest in shelters and finish the whole job as quickly as poss.

    Meanwhile have a chuckle at the expense of those London peers who are being pick-pocketed more heavily than you.

    Re: the house. I’m sure there’s a good reason not to, but could you buy a house outside of London? Even if you don’t intend to live in it.

    This line made me larf: ‘and spend half my days clucking over my ever-growing nest egg.’

  • 53 The Accumulator January 9, 2016, 4:51 pm

    Urk, that is politically unjustifiable. I have no idea what colitically is.

  • 54 Jaygti January 9, 2016, 9:53 pm

    With regards to tax, as an employee i just put enough in my sipp to get me under the 40% bracket.
    As far as working hours go, I was on enforced short time during the recession, and despite having little money , I loved it.

    Since then I’ve always only worked four (long) days , even though I could work five if I wanted too.

    I’ve worked out I could retire 5-7 years earlier if I worked 5 days, but I’d much rather work a shorter week.
    This is of course only possible because my employer is very flexible and I don’t mind the job I do.

  • 55 Investing tortoise January 10, 2016, 1:57 am

    I dropped to a 4 day week from last April and I haven’t regretted it. One less shirt to iron – yes, also one less commute – and I so hate the commute even though it is only 20 minutes each way. I was just in the higher rate tax band and have now dropped out of it, so I won’t even have a tax return to fill in any more.

    As others have said, I am not sure why you would stay in London, perhaps family or other ties that you haven’t mentioned. Move down here to Dorset, it’s lovely.

    On a practical note, the FTSE All Share Index is yielding more than 3%, Europe less than that and the US even less. So, I have always put the higher yielding UK tracker fund in my ISA first, or when re-balancing, that will help me below the £5000 threshold.

  • 56 gadgetmind January 10, 2016, 9:36 am

    I commute by bicycle, which can be hairy but it wakes you up, and no shirts to iron as I work in t-shirts and jeans (which I guess my wife irons!)

    I’d love not to have to do tax return, but have had to do one every year since final year at uni, and I even had to VAT register while still a student! My wife also has to do a tax return every year, even during her 20 year career break. Both now done for 2014/15 with her getting a £40 refund and me having an extra £4k to pay. Oh well.

  • 57 The Investor January 10, 2016, 12:27 pm

    @all — Well, I’ve learned over time that you never can tell which posts will strike a chord, and this one seems to have hit a bit of a Rachmaninoff-style seven multiple fingered job among the Monevator readership.

    I can’t possibly reply to everyone individually so I won’t try, besides a special thanks to @Minikins and @Mathmo for the warm welcome back.

    I’d also like to thank everyone for sharing so many different approaches to the issue. There’s a lot of food for thought here, for most of us it seems.

    One thing that did occur to me from the several comments suggesting leaving the money in the company is that I haven’t even considered reinvesting it into the business. Somewhat telling I suppose that I am not fated to be the next Richard Branson!

    Practically speaking, that means reinvesting in Monvator, since my own freelance work doesn’t scale. If I could invest £10 to get £12 from this website I would, even if discounted out over a couple of years, but currently most income trends are down (as we’ve discussed before, a combination of ad blockers, Facebook, and the move to mobile is dinging ad revenue). I could spend and probably should spend some of the money on time to figure out an alternative approach to monetization… but we’re getting seriously off-topic here!

    Changing my circumstances and downsizing looks like it’s going to happen sooner or later. I have to accept I haven’t cracked London, due at least partly to the much-discussed property SNAFU, and some days it feels like it’s close to cracking me. I’ve always had this notion leaving on anything other than my own terms will be a failure, but there you go.

    There are other reasons to stay here (I’m single and I’m not a kid any more — much easier to be that in a City than in the countryside) but I love the middle of nowhere, too. Perhaps that’s the issue — I don’t think I’d move from London to Bristol, more like London to a village outside Aberystwyth, or maybe outside Alicante for that matter! So quite a leap.

    Finally, the link to Thatcher’s comments on imputed rent were very interesting. A concept some flatly deny exists was once recognised in the tax code! I’m not saying it should be today — just that it’s a reminder that clearly we as a society have run up against some of these wealth distribution outcomes before. Around and around we go…

  • 58 Planting Acorns January 10, 2016, 12:38 pm

    Thanks for the efforts you put into this blog…I love it.

    I’m an employee, so this comment is aimed mainly at other employees…I’ve found condensing hours rather than reducing them is the secret to a happier work life balance. I used to work ten hour days, and it was by far happiest work period of my life !

    I did as many hours then as I did now (basic of 40 a week, reality between 45-48), but not shaving / ironing/ commuting that extra day made all the difference

  • 59 Oracle January 10, 2016, 2:33 pm

    I’m 29, live in London and now earn ~£250k and yet am only just in a position to buy a flat in a nice area (no rich parents or inheritance for me and majority of income is bonus.) What grates me more than anything else is seeing friends and colleagues who’ve inherited/been gifted hundreds of thousands of property related pounds, and not paid any tax on the money. It seems ridiculous that the tax bill of someone who earns £50k is well over double someone who earns £25k yet inherited a million from their parents and whose house has gone up 50pc in the last five years.

    That said, there is zero chance of a conservative government changing any of this, so it’s set in stone until 2025. My advice is don’t put any money in a pension (though it looks good before April they will have clawed it back before you retire) and buy a property in the most prime location you can, somewhere in genuinely short supply, not in Acton, Clapham, Kilburn etc, prime rents (if not values) are still cheap and will likely go up in the next few years which will support prices at these seemingly ridiculous levels (though it makes sense that earnings ratios are higher than ever before, rates are never going back to 5pc)l

  • 60 Steve R January 10, 2016, 4:25 pm

    This absolutely struck a chord with me too. I’m bumping up against the hidden 60% tax band, so while I’m “lucky” to be earning that much, the tax take on my income really grates, and if I can’t make pension contributions to keep under the 60% band it’s going to really hurt. To make it worse, I seem to get continual hassle from HMRC about niggling bureaucratic aspects of tax payments which just add insult to injury; can’t they just take my money and leave me in peace?

    I’ve had exactly the same thought about free time not being taxed, but I’m instead sucking it down and aiming to become FI in a few years time instead (at which point I will try to find satisfying if low paid work and pay no or minimal tax). While it’s probably going to be OK, I also worry a bit about my line of work becoming less lucrative and potentially more unpleasant as time goes on, so I kind of want to make hay while the sun shines.

  • 61 T January 10, 2016, 8:21 pm

    While there is no direct tax on free time VAT is a pretty effective indirect one!

  • 62 IanH January 11, 2016, 12:26 am

    Re. This point
    ” I have to accept I haven’t cracked London, due at least partly to the much-discussed property SNAFU, and some days it feels like it’s close to cracking me. I’ve always had this notion leaving on anything other than my own terms will be a failure, but there you go.”

    I moved to London for university and stayed for ten years and I could never understand why everyone in the country didn’t move there straight away. Then when I did move out it was as if a spell cast by the wicked witch was broken – it felt like I’d been in the grip of some kind of madness. I guess I’d move back again, but only if I could be supported by a great aunt Agatha in the same manner as Bertie Wooster.

    Just for fun go on rightmove and see what you can pick up for 400k around Bromsgrove. Add on you can hop on your bike and be lost in some lovely quiet countryside literally on your doorstep, or hop on a train and be outside one of Europe’s best concert halls in 20 minutes, what’s not to like? And there’s no end of hi tech and finance work around here -HSBC are just about to move up to Birmingham from Canary Wharf I believe. And you can get to the west end in about the same time it takes you from Putney, if you need the occasional fix.

  • 63 L January 11, 2016, 3:15 pm

    Another fan of condensed hours here – I spent the last 4 years in my current job trying to manufacture a decent reason to avoid Fridays in the office. Eventually my beautiful daughter arrived and in another 4 years, I get to have an actual day off once she goes to school 🙂

  • 64 Tyro January 11, 2016, 4:39 pm

    @TI

    “I’ve always had this notion leaving on anything other than my own terms will be a failure, but there you go.”

    Well, change your terms. Then you can still leave on them. 🙂

    A very perspicacious post this week, as the comments attest. I too viewed the prospect in 2016/2017 of reductions in higher rate tax relief, bumping up against the annual allowance, scheduled deteriorations in my workplace pension scheme, higher NI (via removal of contracted-out reduction), changes to taxation of BTL, increasingly irritating and unsatisfying job, diminishing number of years in which to do productive/rewarding stuff and achieve ambitions before decrepitude removes those possibilities, etc etc, and …. as a result I jacked it all in at the end of last year. I am now FI. Since I’m far too young to really retire from productive activity and have got too much I want to get on and do, my plan is to work as, how, and when suits me (as self-employed) but I will not take a salaried post again, I will not work full-time again, and my total tax & NI bill is going to be kept very very low from now on.

    Unlike some I have no ideological objection to taxation, just a visceral response dependent on the relationship between job satisfaction and the proportion of earnings. If I was being paid to do something I really loved doing and would want to do anyway, then even high rates of tax wouldn’t deter me from doing it. But once I’d got to the stage of feeling that 90% of my working time was spent on unreasonable hassle (often with people I didn’t want on my radar anyway), it occurred to me that for every unit of time spent doing things I detested I was putting up with 100% of the annoyance but receiving less than 50% of the compensation for it (and in this context I do think ‘compensation’ rather than ‘remuneration’ is the correct term). So, adios job. I should footnote here one of Ermine’s rants about the loss of autonomy in professional careers. Perhaps it’s starting to reduce the tax base?

  • 65 gadgetmind January 11, 2016, 4:46 pm

    The UK’s tax base has been heading in a worrying direction for many years with an ever-increasing focus on raising more and more money from a smaller and smaller percentage of tax payers. This may be a vote winner but it’s not healthy or sustainable.

  • 66 Adam January 24, 2016, 7:55 am

    Bertie Wooster had his own money, he wasn’t supported by any aunts, especially not Aunt Agatha!

  • 67 theFIREstarter January 25, 2016, 6:30 pm

    It sounds like we are very much cut from the same cloth TI, I’ve come to very similar conclusions over the last year or two.

    I would love to sit down and have a beer with you one day!

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