Hey, do you know your tax bracket? I’m talking about the crucial bands that determine whether you’re a basic (20%), higher (40%), or additional rate (45%) taxpayer.
Everyone knows their height and their shoe size. To be frank, most teenage boys spent a furtive moment with a ruler.
But many of us have no idea where each tax bracket starts and ends. Nor where our income falls within these bands.
It’s pretty ironic. Think about how much time we spend at work, wishing we earned more money. Not to mention all those debates about public services, taxes, and spending.
Perhaps the freezing of personal tax allowances in recent years has made people a little more aware.
Yet I suspect many people still don’t know how much of their own salary they get to keep.
Let’s begin with the hard numbers. Then we’ll get into what your tax bracket means for your take home pay.
2023/2024 UK tax brackets
The rate of tax you pay depends on your total income from all sources. This includes salary, interest, dividends, pensions, property letting, and so on.1
You add up all this income to get your total income figure.
You then subtract your personal allowance from the total to see which tax bracket you fit into. More on that in a mo’.
For England, Wales, and Northern Ireland, the income bands after allowances are currently:
Note: If your non-savings taxable income is above the starting rate limit, then the starting savings rate does not apply to your savings income.
Scotland has its own (similar) tax rates. See the Scottish Government for the gory details.
If you prefer to think in terms of tax bands – that is, before deducting the personal allowance – then for England, Wales, and Northern Ireland these are:
Personal allowance at 0%: £12,570
Basic rate 20% – £12,571 to £50,270
Higher rate 40% – £50,271 to £125,140
Additional rate 45% – £125,141 to the moon
Again, the higher rate threshold has been frozen until 2028.
Complicating factor alert! If you earn over £100,000 you’ll pay a marginal rate of 60% on some of your income. What joy! More on that below.
2023/2024 personal allowance
The tax year runs from 6 April to 5 April the next year.
All of us have a basic level of income – whether we’re employed or self-employed – that we can earn during this period before we have to pay income tax.
But after your allowance is used up, the government starts taking its due via income tax.
The personal allowance system was simplified a few years ago. Everyone now starts with the same personal allowance, regardless of age.
For 2023/24, the personal allowance is £12,570.
Your personal allowance may be bigger if you qualify for Married Couple’s Allowance or Blind Person’s Allowance. It’s smaller if your income is over £100,000. We’ll get to that in a minute.
Note the £12,570 personal allowance is the same as in 2021/22, and it’s frozen until 2028. This is purportedly to raise revenue to pay for the extra State spending during the pandemic.
Freezing the allowance means that as your salary rises over the years, proportionally less of it is covered by the tax-free band. You’ll therefore lose a greater share of your income to tax.
Blind Person’s and Married Couple’s allowance
There are two other personal allowances you might qualify for:
Blind Person’s Allowance – £2,600
Married Couple’s Allowance – £1,260
These are added to the standard personal allowance, if you qualify. They can give you or your spouse a slightly higher personal allowance.
MoneySavingExpert has a good guide to the Married Couple’s Allowance.
The 60% tax trap for those earning £100,000 or more
If you’re on a much-coveted six-figure salary, I’ve got some unpleasant numbers for you.
Anyone with an income of over £100,000 sees their personal allowance reduced by £1 for every £2 of income above the £100,000 limit.
This effectively increases the marginal rate of tax you pay between £100,000 and £125,140 to 60%.
For income above £125,140, the 45% additional tax rate applies.
Ironically then, you’re taxed at a lower rate on earnings on your income over the £125,140 level. That’s because your personal allowance has been totally whittled away by this point.
The effective 60% marginal rate payable on that specific £25,140 chunk of income above £100,000 is far higher than the official tax rates would indicate.
The child benefit booby-trap
Got kids? There’s a similar effective hike in the marginal tax rate when either parent earns over £50,000 a year and so is disqualified from claiming child benefit.
See if you can increase your pension contributions in order to keep your child benefit and so avoid being penalised.
How tax brackets work to determine the tax you pay
Let’s run through a couple of examples to show how this all works.
Basic rate payer
Let’s say you will earn £45,000 in 2023/24 from all sources. Your taxable income is £45,000 minus your personal allowance of £12,571.
So £32,429.
This put all your income in the 20% tax bracket, as it’s less than £37,701 in the first table above.
In practice you’ll pay no tax on the first £12,571 you earn, and 20% on the remaining £32,429.
You’ll therefore pay £6,486 in tax on your income.
Higher rate payer
Now let’s imagine your total income adds up to £60,000.
By the same method (£60,000 minus £12,571) your taxable income is £47,429.
The first £37,701 of this will be taxed at 20%.
The rest – £9,728 – is taxed at 40%.
You’ll pay:
Basic rate tax of £7,540
Higher rate tax of £3,891
Total tax paid is £11,431
In nearly all cases you’ll also pay additional and hefty National Insurance contributions.
National Insurance
National Insurance is in practice an extra tax you pay on your earnings. It comes with its own fiddly rules – and in recent years the Government has been prone to messing with them.
That’s probably because people find it even harder to keep track of what they’re paying in National Insurance than with income tax. National Insurance rates are therefore less politically hot than income tax rates.
The big news recently was that the main National Insurance rate for employees was cut from 12% to 10% on 6 January 2024. Class 2 National Insurance contributions for the self-employed will be scrapped in April, too.
Yet only a couple of years ago, National Insurance rates were increased by 1.25%. Ostensibly this was to pay for the NHS and social care.
So you can see the Government has mostly just reversed its own hike made in April 2022.
One recent-ish change was more sensible. From 6 July 2022 the personal allowance became the threshold for starting National Insurance payments. This means everything you earn within the personal allowance is now 100% yours to keep – with no tax or National Insurance to pay.
A welcome piece of simplification in a sea of complexity.
Indeed, anything else we write here about National Insurance will not be exhaustive enough to stop someone saying “what about X?” in the comments.
Don’t blame us! Blame the labyrinthine UK tax system.
National Insurance rates
Just briefly then, most employees currently pay what are called ‘Class 1’ contributions at the following rates:
Your employer also pays National Insurance contributions, based on your salary. This gives rise to the technique known as ‘salary sacrifice’.
With salary sacrifice you give up some pay in return for some other benefit – usually pension contributions. You get the benefit, and you and your employer also pay less National Insurance.
Self-employed people make different contributions, depending on profits. These are typically worked out via your self-assessment tax return.
As I’ve already moaned, it’s all an extra hassle to keep tabs on.
In a sensible world National Insurance would be merged with income tax. This doesn’t happen because (a) supposedly the money it raises is set aside for state pensions and other welfare funding (it’s not really) and (b) no UK government wants to been seen introducing an income tax rate that’s transparently above 50%.
Learn more if you’re a masochist on the official National Insurance pages.
Your tax bracket determines your take home pay
Like many students, I was philosophically a left-wing tax-and-spender.
It was a pretty low-stress position to hold when I paid no taxes!
But then I got a job.
Suddenly I saw how much money would be taken out of the meagre pay I received for ramming my head repeatedly into the coalface for 40 or more hours a week. Financially, I turned more to the right.2
As my dad used to say, quoting someone else:
If you’re not a socialist at 20 you haven’t got a heart.
If you’re not a capitalist at 30 you haven’t got a head.
I’d add: if you don’t know your tax bracket then you haven’t got a clue.
Most of us care most about how much of what we earn we get to keep. Not so much about how we’re helping to fund the NHS or to pay interest on the UK’s national debt – vital though both may be.
When we start working – and we start paying taxes – we’re shocked by how much less of our pay we actually get to keep.
Beyond the sticker shock
But knowing your tax bracket is about more than just stopping you from fainting when you open your payslip.
Because armed with this knowledge, you can also be more strategic about adding money to ISAs and pensions.
As we’ve seen, the tax system gets progressively more punishing as your salary passes through various thresholds. You might therefore prefer to put more of your more higher-taxed earnings into a pension.
Thanks to pension tax relief, this way you sacrifice less of a share of your post-tax disposable income, while building up a bigger retirement pot.
A fiscal drag
The tax take from British workers has been rising for more than a decade.
This was partly achieved by ‘fiscal drag’.
Fiscal drag sees rising salaries pulling more workers into the higher rate tax bands, because the tax band thresholds and allowances are frozen or only raised by a bit – despite high inflation.
After the financial crisis of 2008/2009, the threshold for higher rate tax was even explicitly lowered, despite inflation running over target. That move dragged millions more people into the higher rate tax bracket.
National Insurance rates rose for higher rate tax payers. And the wheeze that slashed the personal allowance for those earning over £100,000 was introduced.
True, the additional rate of income tax was cut from a short-lived 50% to 45% in 2013. And eventually both the personal allowance and the higher rate tax threshold were lifted.
But as we’ve seen they’ve since been frozen – and they will stay frozen for years to come.
In short, if you remember the arcade game Frogger, that’s a good analogy for the ever-changing UK tax landscape.
Bring me higher (tax) love
Some may quibble with my simplified narrative. But it’s directionally correct.
See this graph from the IFS, and pay particular attention to the yellow line:
The truth is being a higher rate tax payer is no longer enough to classify you as wealthy.
Yes, I’m well aware that the median annual income in the UK for full-time employees is still less than £35,000 – well below the higher rate bracket. Nobody needs to get on a soap box to shout at me.
I’m not saying life is fair, either, or that income inequality isn’t a problem. (My voting record reflects my views.)
But the fact stands. Paying higher rate tax hardly makes you Bertie Wooster these days.
Resistance is tax-efficient
I’m all for taxing, spending, and the UK offering a decent welfare safety net.
But I’m not going to leave a tip.
I’m a law-abiding citizen. However there are sensible and legal steps you can take to mitigate your total tax bill.
Use as much of your ISA allowance and/or a pension to shelter your savings as possible. Take steps to manage capital gains tax. You could also consider VCTs and EIS schemes if you’re up for the research, extra costs, and greater risks.
Higher rate taxpayers should consider making maximal contributions into their pension. Most people are now allowed to pay up to £60,000 into a pension in a year3, so there’s a lot of headroom.
If you can cut your spending by enough to make big contributions, you might be able to get the higher rate tax you’d otherwise have to pay entirely wiped out by tax relief. Depending on how much you earn, of course.
Large pension contributions can really accelerate the growth of your retirement pot too. Just remember you’ll almost certainly have to pay some tax when you withdraw a pension income later.
Changes over the past decade have made pensions much more attractive than they were. Even I, a former pension-phobic person, would prefer to lock away some of my money for many years in a pension than chuck it away by paying 40% or 45% tax on it today.
The bottom line is taxes are continuing to rise. Take cover, or take the pain.
Note: This article was updated in February 2024 with the latest UK tax bracket and personal allowance numbers. Comments below may refer to old rates. Check the dates if unsure.
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There exist allowances and reliefs for some of these income sources, such as dividends and savings. These can reduce how much of that income is taxable. [↩]
To be clear, I’ve no problem with a reasonable level of taxation, public spending, and redistribution. It’s more that back then I had no idea what was already being taxed and spent! [↩]
For years now, dividend tax rates have been increasing. In addition investors have been hit with a massive reduction in the already miserly tax-free dividend allowance.
Let’s run through the current dividend tax rates and allowances. We’ll then consider how we got here, and what you can do about it.
Dividend tax rates for 2023-24 and 2024-25
The rate of tax you’ll pay on your dividends depends on your income tax band.
UK dividend tax rates are currently:
Basic rate taxpayers: 8.75%
Higher rate taxpayers: 33.75%
Additional rate taxpayers: 39.35%
But note that depending on your total earnings – and where it comes from – you could pay tax at more than one rate on your income.
These higher dividend tax rates went into effect on 6 April 2022. At that point the tax rate for each band was hiked by 1.25 percentage points.
A pledge to reverse the hike was made with the Mini Budget of 2022. But this was scrapped by replacement chancellor Jeremy Hunt when he took office.
I hope you’re keeping notes at the back.
We’re talking about dividends paidoutside of tax shelters. Dividends earned within ISAs and pensions are ignored with respect to tax. Adding up your dividends for your tax return? Don’t include dividends paid in ISAs or pensions. Forget about them when it comes to tax. (Enjoy them for getting rich.)
The tax-free dividend allowance 2023-24 and 2024-25
As of 6 April 2023, the annual tax-free dividend allowance was reduced to £1,000.
It’ll halve again in April 2024 to £500 for 2024-25.
Dividends you receive within the tax-free dividend allowance are not taxed. But breach the allowance and the rest is taxed according to your income tax band.
Like other tax allowances such as the personal allowance for income tax, the dividend allowance runs over the tax year. (From 6 April to 5 April the next year).
The £1,000 dividend allowance means you only automatically escape dividend tax on the first £1,000 of dividend income. This level of dividend is tax-free, irrespective of how much non-dividend income you earn and your tax bracket.
As already noted, things get worse from April 2024. From then you’ll only be able to receive £500 before you start paying tax on your dividend income.
(You read somewhere about the old Dividend Tax Credit system? It was scrapped years ago.)
For example, if you received £6,000 in dividends, then tax is potentially charged on £5,000 of it. (£6,000 minus the 2023-2024 £1,000 tax-free dividend allowance).
As we said, the rate you’ll pay depends on which tax bracket your dividend income falls into.
Beware of being bounced into a higher tax band
If you own dividend-paying shares outside of an ISA or pension, then the dividends may add substantially to your total income. Perhaps enough to push you into a higher tax bracket.
If you own funds outside of tax shelters, you could also owe tax on reinvested dividends. Choosing accumulation funds doesn’t spare you the tax rod – unless they’re safely bunkered in your tax shelters.
Watch out for withholding tax on dividends
If you’re paid dividends from overseas companies, you may be charged tax on them twice. Once by the tax authorities where the company is based, and again by Her Maj’s finest in the UK.
You may even pay this withholding tax on foreign dividends held within an ISA or pension.
However there are reciprocal tax treaties between the UK and other countries. These can at least reduce the total amount of dividend tax you pay.
Your broker should take care of this for you.
Some territories do not charge withholding tax on dividends received in a UK pension. The US is the most notable one. (This doesn’t apply to ISAs. Choose where you shelter your US shares accordingly.)
Again, make sure your platform is paying you any US dividends in your pension without any tax having been charged.
It can all get a bit fiddly. See our article on withholding tax.
Why was the old dividend tax system changed?
Then-chancellor George Osborne revamped UK dividend taxation in the Summer Budget of 2015.
He apparently wanted to remove the incentive for people to set themselves up as Limited Companies and then use dividends as a more tax-efficient way to get paid, compared to salaries.
Osborne also said the changes enabled him to reduce the rate of corporation tax.
But whatever his intentions, as we’ve seen today’s regime applies equally to dividends received from ordinary shares.
Even worse, the initially fairly-generous dividend allowance of £5,000 – designed to avoid small shareholders being taxed on legacy dividend-paying portfolios – will be just £500 from April 2024.
Osborne’s problem with dividends
The old system of tax credits on dividends was designed roughly 50 years ago.
Corporation tax rates then were above 50%. Add in personal taxation, and some people saw the income earned by the companies they held taxed by 80% or more.1
Since those ancient days, however, corporation tax rates have fallen.
And the government wanted to simplify things.
The good news was the confusing tax credit system got the chop.
The bad news was we now pay much more tax on dividends.
The changes threw a spanner into the works of some older wealthy people. They had based their portfolios (and their retirement plans) on how dividends were previously taxed.
That’s because before 2016 the implicit ‘dividend allowance’ was as much as £31,786, so long as your income from non-dividend sources was below your personal allowance.
So some people held huge income portfolios outside of tax shelters. At the time this was fine because of how much you could get in dividends before taxes kicked in.
How things have changed!
Some people saw their dividend tax bills soar
Most small investors have not been hit by changes to dividend tax. Most of us hold our shares within ISAs and pensions nowadays.
However there are exceptions.
Small business owners paid a dividend by their limited companies now pay more tax. Salary-sized dividends chew straight through today’s puny dividend allowance.
There also exists that dwindling cohort of older investors who built up a big portfolio of income shares outside of ISAs and pensions. They’re paying much more tax too.
Always use your tax shelters
For years I urged these dividend investors to move as much money as possible into ISAs. They could do this by defusing gains to fund their ISAs, for instance.
The ISA allowance is a use-it-or-lose-it affair. You must build up your total capacity over many years.
Yet inexplicably to me, some argued – even in the Monevatorcomments – that there was no point.
Dividends were not taxed until you hit the higher rate band, they said. So why bother?
That was true under the old system. And maybe there was a harder choice to be made if you also had massive cash savings. Because when interest rates were higher, there was more competition for your annual ISA allowance. (A dilemma that’s returned again with interest on savings accounts back around 5%.)
But the truth is taxes on dividends were always liable to change. And eventually they did.
At that point, the people who had declined to move some or all of their portfolios into ISAs – just to save a few quid – were hit with big tax bills.
I hate to say I told you so. (Truly – I write a blog to help people.)
ISA sheltering costs nothing. Even back then there was at most a trivial cost difference with an ISA versus a general account. Nowadays there’s usually none.
Get any non-sheltered portfolios into an ISA (and/or a SIPP) as soon as possible, if you can. Not just to avoid dividend tax, but also to shelter from capital gains taxes and other future regulatory changes.
Note: I’ve removed talk about the old way UK dividends were taxed in the comments to reduce confusion. We have to let go! But the discussion may still refer to old (or incorrect) dividend tax rates and allowances. Check the dates if unsure.
Remember, companies paying you a dividend have already paid corporation tax on their profits. That’s before any dividend is paid to you. [↩]
It might just be that my complainy pants news filter is set too high to assess the state of the nation but are you sure you’re getting a balanced reading breakfast to keep your glass topped half way up @TI?
That was in response to a post where I was indeed being negative about the returns from investing lately – once you excluded the big gains from the so-called ‘Magnificent Seven’ US tech giants.
Well, investing returns – equities and bonds alike – have been mediocre-to-bad since I first got negative in late 2021 and then more so. Especially once you adjust for inflation.
I do understand this is in on top of my multi-year negativity about the rubbish results from Brexit, though.
Eeyore stories
Let’s be clear. I wholeheartedly agree there’s plenty of great stuff going on in the world, from new vaccines to the renewable energy cost collapse to the ongoing joys of K-Dramas.
But (geo) politically and economically it’s been rough sledding. Better, in some respects, than it might have been, especially when it comes to the US economy. But thin gruel elsewhere at best, and war at worst.
Here are five fairly random graphs I came across just this week that shine light on the gloom.
In this Telegraph article the author rightly accuses the British State of self-harm against its own economy and citizens, but studiously avoids mentioning Brexit as one of the causes. (See Goldman’s latest estimate on the damage from Brexit in the links below).
Anyway his graph illustrates why workers feel they’ve not gotten any richer for many years.
It’s because they haven’t. That’s a fact, not me being negative.
Households are living through the worst inflation shock for generations. January inflation unexpectedly held steady – a small rise was forecast – which was welcome. But inflation is still double the official target rate.
Inflation should fall fast from here (more global strife notwithstanding).
But the pain is real and it will have lasting consequences.
Falling house prices are good news from the personal perspective of priced out would-be buyers. You can argue too that a permanently lower level of prices would help the economy, by aiding mobility or redirecting investment to more productive areas.
Nevertheless, their own home is many people’s biggest investment and asset. Lower prices make them and the country poorer.
Property prices fell in 2023 as mortgage rates leapt higher.
That’s a fact, not me being negative.
Graph #5 from Decarbonsation, an annually-updated presentation by analyst Nat Bullard
You may be a Blimp-ish climate change denier – aka scientifically wrong – but for the rest of us, this is grim viewing.
Happily there’s far more positive visuals showing progress in the fight to curb carbon emissions if you click through the rest of Nat’s presentation.
But that’s for the future. Right now things are bleak.
When the facts change I’ll change my mind
I’m not having a go at any reader who feels Monevator has been a bit morose in recent years. Reader SLG above was perfectly civil about it – and I appreciated their nice words about the effort that goes into compiling these weekly links, too.
I am fed up with the negativity myself. The difference is I believe it is out in the world, and that noticing it is warranted.
Putting your fingers in your ears doesn’t make it go away.
Coming out of the financial crisis Monevator was sometimes accused of being a haven for happy-clappy permabulls. I look forward to getting there again.
And as I’ve already said, it’s true things could be worse.
The greatest architects of Britain’s self-harm – among the worst set of politicians we’ve seen in power in the UK for hundreds of years – are no longer fully in charge. The virus that was responsible for even more of the recent misery is a fading memory. Wars lamentably rage on, but so far they’ve not metastasised a into wider conflict.
Oh and at least it’s not the 1970s, as a wonderful series of podcasts fromThe Rest Is History this week reminded me. Start with that first podcast covering 1974 and work your way through the darkly comic chaos.
We survived the 1970s and we will get through this. Poorer, but who knows maybe wiser for the journey.
Long-time Monevator reader @old_eyes has enjoyed a stimulating career and a healthy income. Sound investing decisions have put his household on a firm footing as he and his wife enter their 70s. The challenge though is that they need to support TWO households. Please enjoy the latest in our series of real-life FIRE profiles.
A place by the FIRE
Hello! How do you feel about taking stock of your financial life today?
I feel that I have reached a good place, with financial independence reasonably secure. There is always the risk of some left-field catastrophe, but if the world continues its journey with a recognisable financial system, we should be okay. So now is a good time to look back on the journey and ask how we got here.
Whether there are any messages for other members of the Monevator community seeking FIRE, I don’t know. I was a late starter with serious saving and investing, didn’t really retire early, and I have not done anything clever or special.
I am also acutely aware how lucky I have been, not only in having a good and satisfying career, but also in being born at the right time. A time when defined benefit pensions were the norm, student debt was unknown (apart from sometimes having to grovel for a tiny, tiny overdraft), and homes were an understandable multiple of earnings.
It is a very different world for the next generation.
How old are you?
I am 69 and my wife 70. We have been together for 46 years and married for 40. (It’s a shock to write those four numbers down!)
Do you have any dependents?
We have two sons. The older is 37 and on the autistic spectrum, the younger 34.
Our older son is totally dependent on us. He has never worked and is extremely unlikely to ever work. He also has some health issues arising from an auto-immune disease.
We have been able to buy him a house in the centre of Liverpool. There he can live independently, something that would be impossible in our rural location. We cover all his bills as the state is unable/unwilling to do very much for him. So, we are effectively running two households. It is better for him to be where he can walk or get public transport to wherever he wants to go, and where there are accessible services and amenities. However, it does increase the costs.
His situation has a big influence on how we think about our savings and investments. They must support him after our deaths for the rest of his life. It is not just financial independence for us, it is lifetime financial independence for him. We can’t see the state becoming more generous to the unfortunate in the foreseeable future. Ours does not feel like a very caring society, and with fewer working people available to support those retired on unable to work, it is hard to see that changing.
Our younger son is married to an American and lives in the Bay Area with their young daughter. He works in marketing and communications for the tech industry. We have had to get used to the ferocious turnover rate that characterises that sector. From one call to the next we are never sure who he is currently working for – or whether he is currently working at all.
Where do you live?
We live in North Wales in a very rural area. It sounds out of the way, but we are an hour from Liverpool, an hour from Manchester and an hour from Snowdonia (Eryri). Unfortunately, rural transport is dire, so we are a two-car family.
When do you consider you achieved Financial Independence?
In 2016 at 62, the job I was then doing vanished out from under me. We looked at the numbers and realised that we had enough for financial independence now, and with a good chance of meeting our remaining financial goal of leaving a legacy for our autistic spectrum son.
I wasn’t aiming at a particular number. I knew I didn’t really want to go on until state retirement age, and the restructuring at work provided the incentive to consider whether I had reached FI. It looked okay so I pulled the trigger. Now I did not need to work anymore.
What about Retired Early?
I ran my own consulting company from 2001-2012. It was quiet across 2012-2016, whilst I was doing a last corporate stint, but picked up again after 2016. Now I have achieved FI, I am much more selective about who I work with. It is now almost entirely not-for-profits working in areas I think are important.
I try not to work more than a couple of days a week, but there are occasional intense bursts of activity.
I am still enjoying the work and will stop when I have had enough. Unlike @ermine, I never had a burning desire to get the hell out of it. My career was pretty pleasant, and although I suffered under stupid management from time to time, I always felt the work itself was satisfying.
It would be nice and neat to carry on to 2026, the 25th anniversary of founding my consultancy, but I am not sure I am motivated enough. I expect to quietly fade from view.
Assets: definitely maybe
What’s your current net worth?
I always find net worth a tricky question to answer.
Well, what are the main assets that make up your net worth?
We have £630,000 in cash and investments (with currently about £64,000 in cash-like assets). Almost all now in ISAs and a small SIPP for my wife.
If I closed my company down today, there is probably about £110,000 that could be taken out (after corporation taxes, but before personal taxes).
I have two defined benefit pensions, a full UK state pension, and a small Dutch state pension (I spent five years in the Netherlands working for a multinational). They currently total £96,000 p.a., so applying the 20x rule for Lifetime Allowance calculations, they are worth £1.92 million.
Is that part of net worth? I can’t do anything else with it except to take the income. If I still had a regular paying job, I would not multiply my salary by 20 and call that the cash equivalent. It would just be income.
Our house has not been on the market since 1986, so current value is a guess. Conservatively, £400,000. It’s a large house, but in a cheap part of the country.
My wife owns the house in Liverpool where our autistic son lives, bought with a legacy from her deceased father. She has about £80,000 in cash savings left over from that legacy, plus a full UK state pension and the same small Dutch state pension. The house will be passed onto our son. We are currently working out how best to do that.
We try to keep her pension and cash savings out of our thinking. It is her ‘mad money’ for when she wants to run away and join a circus. If we had to dip into it, I’d want to replace it as soon as possible.
What’s your main residence like?
We live in what was a two-up, two-down 17th Century stone farmhouse, that has been extended over the years. It once had stone shippons on each side – cow or animal barns, beudy in Welsh – and we still have some of those heavy stone walls inside the house. We added our own extension when I started working from a home base in 1998, and then a couple of heated conservatories for the gardener, my wife.
Some land also came with the house, and we manage that for wildlife. It was an accidental purchase, we were not looking for a smallholding, but it came with the house we loved. We have had fun digging ponds, planting trees and trying to keep back the blackthorn.
We own the house and land outright, having finally paid off the mortgage in 2010.
Do you consider your home an asset, an investment, or something else?
I’ve never been able to think of our home as an asset or an investment. It clearly is the first and probably the second, but it is not an asset I can use except to live in or borrow against. If I sell, I must replace it with something equivalent. We may downsize later, but that would likely be at a point where we need better access to urban areas and public transport. Such a property would be higher cost per m2.
Judging by the prices of comfortable and conveniently placed bungalows in our area, we would release very little by ‘downsizing’. Yes, I know there are imputed rent savings and all the rest, but I don’t think working that out would help me decide how to save, invest and spend.
Earning: good chemistry
What’s your line of work?
I never had a clearly defined career path. I was always envious (perhaps wrongly) of friends who knew exactly what job they were after, and how they expected their working life to play out.
What I did have was a passion for chemistry. I don’t know where from, but at a very young age (about seven) I was playing ‘chemistry’ with food dyes, water, and various glass bottles in a plastic washing up bowl. By 12 I had a modest chemical laboratory in my bedroom. I think it was the atavistic thrill of creating dramatic colour changes, setting fire to things, and making them go bang.
The passion stayed with me, and I studied chemistry at university without much idea what I would do with such a degree. Finding out that corporates wanted a PhD if you were going to lead research, I started one. Somewhere in the next three years, I decided I really wanted to be an academic, and – PhD in hand – I got a post as a lecturer at my local university.
That was in 1980, just at the start of the Thatcher cuts. (Starting salary £11,000.) A torrid time to be trying to build a reputation and career but I was fairly successful, and by 1986 I had a research group of 12. Unfortunately it was costing me two days a week hustling for money to feed them. I wasn’t sure I could make the impact I wanted staying there.
So, in 1986, I took a senior job with the corporate research group of a multinational. (Starting salary £24,000). I was still spending a couple of days a week on admin, politics, and pitching for budgets, but now I had a team of over 100, more capital to spend, and some really juicy problems to tackle.
In academia, you are often wandering around with a solution asking: “does anyone have a problem that matches this?” And if the problem you are working on is too difficult, you just redefine it. In industry, the problems are real, and will not go away. I liked that.
In 1993 I got a job as R&D director for one of the multinational’s subsidiaries in Europe. (Base salary £99,000). I thought it would be an extension of what I had already been doing, but it was not. Now I was sharing responsibility for the profitability of the company with a whole board of very business-focused people. They taught me a huge amount about what does and does not work in business. I learned that corporate R&D is not the real world. You are still insulated from day-to-day decisions.
In 1998, M&A activity saw the subsidiary I was in transferred to a new owner. There was a lot of fascinating work looking at the jigsaw pieces we had once the dust had settled, wondering what business configurations could be viable. As we sorted it out, I returned to the UK to become Director of Sustainability, working out how we would adapt to the net zero future that was already on the horizon.
Despite this very interesting work, major reorganisation was looming. The acquirer had overstretched themselves and needed to cut costs. As the focus shifted relentlessly to the short-term there was no interest in the longer-term strategies I was promoting. Job satisfaction ebbed away and in 2001 I accepted an offer of voluntary redundancy. (Base salary at that point £89,000).
Now I had to work out what to do next.
Did you leap straight into business for yourself?
My father was a serially unsuccessful businessman. He was okay at the technical side, but hopeless financially. He became a very unhappy man, and I had a very fraught childhood as a result. I swore I would never subject any family I had to the same stresses.
So my first thought was to get back on the corporate horse, but some very senior mentors told me that although I could easily go straight back into another corporate job, it would not make me happy. I was best at starting things, not at running them operationally. In five years’ time, I would be facing the same situation. Why not use everything I had learned about R&D, innovation, and sustainability as a consultant?
It took a lot of people a lot of time to persuade me that I was not my father, and that I could succeed. My wife had stopped working when we had children, so financial stability rested on me. I found that scary, but with a redundancy cheque in my back pocket we agreed to give it a go. Fortunately, some colleagues who had passed this way before told me it would be a year before I got new clients without the help of previous networks, so I did not panic when that turned out to be true. On 11th September 2001 I was on my way to a meeting with my first potential client, when I noticed people crowding around a shop window. TVs were showing planes crashing into skyscrapers. My meeting was cancelled, and nobody answered the phone for the next six months.
Despite my caution, within a year I started a second business with an ex-colleague targeting a different consulting market. That went reasonably well, but we both had other companies and in the end could not give it the time it needed. In 2009 we stopped.
But my own business grew. The first target was to rebuild the redundancy payment I had started with as a cash buffer. I always felt in the early days that I would be rumbled as a fraud and the work would melt away. The second task was to overpay the mortgage. We had previously experienced two bouts of very high mortgage rates with a new house and a new family. I wanted to reduce outgoings where I could.
I discovered a lot of business problems look the same, no matter the sector, so I found myself working with different organisations, both private and public. One was a government department setting up a new arms-length body. That body started off as a client, became a major client, and ultimately my only client. I did point out that paying a daily rate did not make sense when they had an insatiable appetite for my time. Their response was they liked the flexibility, and probably wouldn’t need me next month. They always did.
This went on for a couple of years until, in 2012, the government had one of its regular spasms about the number of consultants and contractors they used. I had to choose between becoming full-time staff or stopping work with them altogether. I thought the work was important and worthwhile, and the pay was acceptable (£85,000), so I took the job. I expected to do it for a few years until I had achieved my goals. In the end it was four years, and I left in 2016 to pick up the threads of my consultancy work again.
Since then, I’ve been working with a small number of clients. All in the public sector or not-for-profits.
One of my bosses described my career as “zig-zagging its way to success”, and that is what it felt like. I always felt that each career decision was the last one I would need to make – and I was always wrong.
What is your annual income now?
My current income is £96,000 in various pensions, plus a small salary and dividends from my consulting company. This is right up against the £100,000 tax trap where the marginal rate jumps to 60%. I try and keep to that figure as a limit, but I’m usually a bit over. I would prefer a more logical and progressive tax system – bring the 45% rate down to £100,000 if we must – but I’m not going to complain too loudly. It is a nice problem to have, and we all should contribute.
I may take advantage of the relaxation of the Lifetime Allowance for pensions next year to increase savings a bit further.
How did your salary progress over the years?
Over my career, my salary started at £11,000, peaked at £99,000, and by early retirement in 2016 it was £91,000. These are base salary numbers, excluding any benefits packages or bonuses.
From 2003- 2012 I was taking what I needed from my business as a salary, adjusted to provide roughly £4,000 a month after tax into my bank.
I was also taking the maximum amount of dividends that were tax-free, and from 2010 paying into a private pension.
When did you first start thinking seriously about money and investing?
In 2001 I left the corporate world, and realised that I was now responsible for delivering a sustainable financial future for my family. Up to that point I had always had a ‘regular’ job and assumed that the company pension would meet our future needs.
I had a deferred pension, which provided a base from which to build, but I realised I would probably need more. The first few years of running my own company were just scrabbling to keep all the plates spinning and learning how to be a consultant.
Was pursuing financial independence part of your career plans?
There was no thought of FIRE until I left the corporate world in 2001. In each job I thought that was me sorted until retirement. I had always relied on the prospect of a corporate pension.
I learned about ‘drop-dead’ money from James Clavell’s Noble House in the 1980s. It stayed a dream in the back of my mind, but I did no serious thinking until about 2010.
Did you learn anything about building your career that you wished you’d known earlier?
Understanding that I was not my father much earlier could have helped me. I could have been more flexible in my career if I had more confidence. But my terror of not having a steady income kept me around large corporates.
On the other hand, working in those large corporates taught me so much of what I have used since. I wasn’t unhappy, and I might not have been ready to branch out earlier.
Saving and spending matters
What is your annual spending and how has this changed over time?
I find it easier to think on a monthly basis. After tax I have £6,200 hitting my bank account each month. About £4,000 goes straight back out in the costs of running two households. So £2,200 a month, or £26,000 a year, in discretionary spending. That goes on major holidays, like visiting our son’s family on the West Coast, our hobbies, repairs and upgrades to the homes (recently a new heating system, PV and battery for our main home, and air-con for the Liverpool house), and savings and investments.
Looking back to when the whole family were living together, the equivalent numbers were £3,000 in regular monthly outgoings and £1,000 as discretionary spend. That included school fees for the younger son and private tutoring for our autistic son.
Income has increased, but although some costs have dropped out as one son left home and education came to an end, inflation and the costs of running two household have pushed up monthly outgoings. We definitely have more headroom now, but we have delayed some spending on the house and travel.
Do you stick to a budget?
We don’t have a budget. Instead, I keep an eye on what is going out monthly in immediate and repeating costs. Things like energy, water, food, telecoms, insurance, council tax, cleaner, gardeners, support for our autistic son, and additional carer costs for my 95-year-old mother.
If it starts drifting up, I check whether it is inflation we will have to live with, or whether we are changing our purchasing habits. That means I know how much headroom there is each month for additional saving and investment or building up the kitty for the next big purchase.
What percentage of your gross income did you save?
I never had a fixed saving percentage. By the time I knew about savings rates, I was running my own business and either taking the minimum I needed each month, or taking chunks as dividends and increasing the pension pot.
Do you have any hints about saving and spending?
For us, saving and spending less come to the same thing. There are two keys – knowing where the money goes, and spending with purpose. We have always had a pretty good idea of what is going out on a monthly basis, and how much headroom we have. A lot of friends and colleagues have very little idea the basic dynamics of their regular expenditure.
We spend intentionally, and I hope thoughtfully, on things that matter to us. When we first married, we made do with a mattress on the floor, but had a very expensive SLR camera and lenses. This shocked our parents, who thought we were not behaving appropriately, but we wanted the camera more than we cared about not having a bed. The important thing was not to try to buy both.
Pay for the needs first and then think hard about your wants. Don’t confuse needs and wants.
Do you have any passion, hobbies, or vices that eat up your income?
Astrophotography is my passion and vice. My pride and joy is an automated observatory I built on our land. It was a cool retirement project. I am also part of a syndicate that rents three scopes at an observatory in Spain that we operate over the internet. Astrophotography is like normal photography but much more expensive.
My wife is a keen gardener, with a very large garden and a small nature reserve. She also holds one of the national plant collections. What with acquiring plants, hiring contractors, and getting help with the heavier garden maintenance, costs of heating conservatories and endless bags of peat-free compost, she probably spends about as much on that as I do on astrophotography.
We spend freely on these activities that bring us joy, but not excessively (at least that is our excuse). As is usually the case, to outsiders it looks like we spend a great deal on these hobbies, but we both know people in our respective communities that spend many multiples of that.
That’s how we work it, one major vice each.
A galactic budget: The Orion Nebula, as captured by @old_eyes.
Investing: passive all the way
What kind of investor are you?
My first steps into investing were rather unguided. In 2010 my business was stable enough to give me a good cash buffer and something left over to invest. I went to an IFA for guidance and started a pension, and an ISA for both of us.
I was aware enough to pay for his advice, rather than allow him to manage my funds, but I did no thinking about where the money was going. In particular, I had no idea what the private pension was invested in, it was just a package from Scottish Widows. There were also a couple of individual shares. (Standard Life demutualisation in 2006, and Royal Mail in 2013).
After that initial phase I just kept paying what I could into the pension pot and added a little to the ISAs. Then I discovered the FIRE community, Monevator and other blogs, and began to think more carefully about where I was investing and reorganising things. I read Rowland and Lawson’s The Permanent Portfolio and based some of my thinking on that.
I ended up with something very similar to The Accumulator’s Slow and Steady portfolio. Initially it was 50:50 growth and defensive (all in funds), but I upped it to 60:40 because of my strong pension position. A rational analysis says I should go further still into equities, but 60:40 is far enough.
But passive. Passive all the way. I have no illusions that I have the time, interest, or expertise for active investment. I don’t think I can beat the market.
Right now, I am simplifying the portfolio as it has become untidy over time with funds from different providers that do the same thing. Rationalising funds, switching to simple global equities and so on.
My wife is very intelligent, but not remotely interested in the mechanics of investment. I need create something that requires the minimum of attention and maintenance, with operational instructions that fit on one side of A4. This is all part of building a ‘dying tidy’ file in case I die first. Something that will tell her or her agents everything they need to know about where the money is and where it gets spent.
What was your best investment?
It is a disappointing answer, but when I rejoined the conventional world of work in 2012, I had the opportunity of transferring the private pension I had built up into the civil service defined benefit scheme.
I had previously been stuffing money into the private pension from the profits of my consulting company. I transferred £177,000 into the civil service scheme and that bought me an index-linked pension of £12,000 p.a. with widow’s benefits.
Given my risk aversion, that was probably the best decision I made.
Did you make any big mistakes on your investing journey?
Most of the apparent mistakes are only visible with hindsight. Why was I in bonds in 2022-23? Answer, because I couldn’t have predicted what happened, and the reasons for investing in bonds are always the same and always valid. It’s part of being a passive investor dummy!
My two mortgages were endowment mortgages, and that caused me considerable heartache. But they were very common at the time, almost the default. I did not know enough to check the assumptions the brokers were making, and they were the only products that were offered to me.
What has been your overall return?
I don’t have much idea for the earlier phase of my investment journey, but I did keep records from 2015 onwards. So I can say that annual return (including fees) was:
Tax Year
Return
2015
2.11%
2016
14.68%
2017
1.23%
2018
8.44%
2019
-3.11%
2020
19.54%
2021
7.78%
2022
-4.66%
I have been putting in and taking out money on a regular basis for chunky outlays: work on our house and the house where my autistic son lives, and various ‘bank of mum and dad’ stuff helping our younger son.
Since 2015 the net contribution to the portfolio is only £8,000, yet the pot has grown by 67% from £374,000 to £629,000. Time in the market counts for a lot.
How much have you maximised your ISA and pension contributions?
From about 2010 to 2016 I was using all our ISA allowances and putting money into pensions.
Changes in the pension Lifetime Allowance pushed me to start taking my first corporate pension in 2013. I took a much smaller lump sum because I wanted to get the maximum regular income coming in. Signs of my continued aversion to risk. That meant I could afford to maximise pension and ISA contributions during the time I was working for a salary again.
Since 2016 there have been modest ISA contributions, as and when the cash buffer was full and there were no big expenditures on the horizon.
To what extent did tax incentives and shelters influence your strategy?
I have tried to make good use of ISAs and pension saving without getting silly. In one purple patch of business, I had more money coming in than I could put into a pension or ISA, so I had a largish slug of bare investments. Conversely, in years when I could not use all our ISA allowances, I moved investments into the sheltered accounts.
Now, apart from the cash buffer, we are entirely in tax sheltered accounts. About 86%.
How often do you check or tweak your portfolio?
I routinely check once a month, but that is really for information only. I don’t rebalance within the portfolio. Only when I am adding or removing money or simplifying.
Wealth: flexible finances
We know how you made your money, but how did you keep it?
Running your own micro-company, earnings are episodic. There is not much opportunity for regular savings and investment. So it was always in lumps. A good quarter or a bonus.
Investment was always into funds and pensions. Funds investment was intended to be buy and hold when possible. We have never invested in property. Too much like hard work.
Which is more important, saving or investing?
I think saving is the beginning of financial independence. That cash buffer is critical for lean periods and big ticket items. Once you have a cash buffer you are comfortable with, investment is possible.
Only you know how big a cash buffer makes you feel secure.
Investment grows your wealth, but savings help you sleep at night. Apart from a mortgage, we have been debt-free since around 1990. All the major one-off items, from holidays to home extensions and heating systems have come out of the cash buffer. And we always rebuild it as quickly as possible.
We know we are not maximising our investments and growing our pot as fast as we could, but it is comfortable. As for leveraged investments – we leave that to people with much better maths and a much stronger stomach.
When did you think you’d achieve financial freedom?
I wanted financial freedom, not to retire early but to work in whatever way suited me. I hoped I would reach that point before normal retirement age, but I didn’t have any specific timeline or plan until FI was already in sight. Perhaps around 58. Then I started thinking that 60-62 might be possible.
Are you still growing your pot?
I am still putting modest amounts into our investment pot. As and when cash is available.
So far, our needs can be met with the pensions, and we have only taken money from the investment pot for ‘bank of mum and dad’ stuff.
Do you have any further financial goals?
I have three goals: to leave a sufficient legacy to support our autistic son, to have enough money for quality care if we need it later, and to enable my wife to continue to live comfortably, should I die first (pension income would more than halve, and her costs would not).
How much do we need for that? I don’t know. My gut and back of the envelope sums say I can hit two out of three with the current pot, and when I stop consulting and close the company there should be another injection of cash. If the investments keep pace with inflation, I think we are okay.
What would you say to Monevator readers pursuing financial freedom?
I have three messages, none of them original.
Time matters, but it is never too late to start. I did not start seriously saving and investing until 2010 at age 56. Yes, I had great ‘floor’ in a decent pension, but I also need to leave a very substantial legacy. The pot to provide that has been built over 14 years. In the last eight years it has grown by 67% with only a tiny net cash investment, and a very conservative asset allocation.
Think hard about what you want to do with financial freedom. Running towards something is always better than running from something. I have seen many people stick at a job they dislike until they make their number, leave with a fanfare, and then rapidly decline in mental or physical health because they had nothing else. “I want to achieve FI so that I can…” is a better story than “I want to achieve FI because I hate my boss”.
‘One more year’ is a real and dangerous way of thinking. At every major event in your working life, check whether you have achieved FI and if one more year is really necessary. Too many people shift the goalposts as they get close, partly out of fear of some unknown catastrophe and partly from the absence of a plan for what next.
You can accuse me of hypocrisy because I have kept on working. Am I not guilty of ‘one more year’? Not really. I sought FI to have the freedom to do what I am doing now. To have the choice. Even if I had a much bigger pot than I need for my financial objectives, I would still be doing the work I am because I enjoy it and I think it does some good.
Any other business
Did any particular individuals inspire you to become financially free?
I had many good mentors and bosses in my career (as well as a couple of real shockers). Each added something particular to my philosophy.
Perhaps the most important influence was a main board director of the multinational I worked for. He was an active mentor from 1990 – 2001. He taught me many things over those years, but the critical intervention was when I was agreeing redundancy in 2001. He took me to lunch, and over a couple of hours gave me a clear-eyed analysis of my strengths and weaknesses, possible future, and introduced the idea of setting up as a consultant.
He also suggested an outplacement agency who would ask the question “what do you want to be when you grow up?”, rather than stuffing me into the first executive position they could find and taking their fee. Without him, the second half of my career would have been very different.
The person who drove my desire for financial independence (safety, in effect) was my father. I saw what living on the edge looked like and wanted out. I saw freedom from want as a solid salary, rather than true FI, and I had modest ambitions, but I wanted ‘enough’ so that I did not have to worry every month.
Can you recommend your favourite resources?
Monevator is always where I start on the web. The mix of learning resources, news, and pointers to interesting things makes it essential. It was the resource that got me organised with a clear plan. I am in ‘maintenance’ mode now, but I still read every post and comments – sometimes in wonder and sometimes confusion.
The only other website I check regularly for updates is Simple Living In Somerset (and before that Simple Living In Suffolk). The grumpy mustelid is a brilliant writer, and their thoughts on living in retirement are entertaining and insightful. Like the IgNobel prizes they make me laugh and then think.
Two books have helped me to understand what I am doing in pursuit of FI, what risks I am taking and why. The first is Daniel Kahneman’s Thinking, Fast and Slow. This has a lot to say about how we make decisions, how prejudices and biases get in the way, and how we convince ourselves we are being logical when we are not. It is a book I return to often.
A much more recent book is Morgan Housel’s The Psychology of Money. It came out after I had reached FI and semi-retired, but it was a great distillation of some of my own conflicts over money and security. It helped me to understand my own psychology a bit better, and hopefully improve my decision making.
What are your thoughts around charity and inheritance?
We give regular moderate amounts to environmental and conservation charities, one-off sums to disaster relief appeals, and intend to leave a bequest in our wills to a conservation charity we have worked with for many years.
In an ideal world we are not great fans of inheritance. Wealth ‘cascading down the generations’ does as much harm as good.
In practice our attitude is dominated by the need to secure the future for our autistic son. Once we accept that, we feel we should make some provision for our younger son to avoid family feuds. We have both seen those in action and they are ugly.
Our younger son knows that he is second in the queue and accepts it (I hope!). And with a bit of luck any inheritance will be so far down the line that it will be of more value to his children.
What will your finances ideally look like towards the end of your life?
For all the reasons given, we hope to die with a big enough stash to provide a 40 year FIRE for our older son and a nice surprise for our younger son.
Nothing super-remarkable in this story, as @old_eyes himself says. And yet also once again entirely personal and full of interesting insights – as well as unique challenges. Questions and reflections welcome, but please remember @old_eyes is just a reader, sharing his story, not a battle-hardened blogger like me. Constructive feedback welcome. Personal attacks will be deleted. See the rest of our FIRE studies.
