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UK tax brackets and personal allowances

Updated by The Investor on June 12, 2025

Know your tax bracket and personal allowance to learn what income is yours to keep

Hey, do you know your tax brackets? I’m talking about the critical bands that determine whether you’re a basic (20%), higher (40%), or additional-rate (45%) taxpayer.

Everyone knows their height and their shoe size. Most teenage boys even spend a furtive moment with a ruler.

But many of us have no idea where the various tax brackets start and end – nor where our income falls within these bands.

True, the freezing of personal tax allowances and income tax thresholds in recent years has made people more aware.

Yet too many people still don’t know how much of their own salary they get to keep, or even how to figure it out.

Let’s begin with some hard numbers. We’ll then get into what your tax bracket means for your take home pay.

2025/2026 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 moment.

For England, Wales, and Northern Ireland, the income bands after allowances are currently:

Income Tax Rate	2024/2025	2025/2026
Starting rate for savings: 0%	£0-£5,000	£0- £5,000
Basic rate: 20%	£0- £37,700	£0- £37,700
Higher rate: 40%	£37,701-£125,140	£37,701-£125,140
Additional 45% rate	£125,141 and above	£125,141 and above

Source: HMRC

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. Refer to 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 below.

2025/2026 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 once your allowance is used up, the government starts to take its cut via income tax.

Everyone starts with the same personal allowance:

For 2025/26, this 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 reduced if your income is over £100,000. We’ll get to that in a minute.

Note the £12,570 personal allowance is still the same as it was in 2021/22, and it’s frozen until 2028. This was purportedly to raise revenue to pay for 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.

Another consequence of freezing the personal allowance is it will soon be insufficient to fully cover the state pension.

The state pension is currently £11,973 a year – just squeaking under the £12,570 personal allowance. But if the pension continues to rise as expected over the next two years then an estimated 12 million people will pay some income tax on their state pension from 2027.

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 six-figure salary then 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 threshold.

This effectively pushes up the marginal rate of tax you pay on income between £100,000 and £125,140 to 60%.

On earnings above £125,140, the 45% additional tax rate applies.

Ironically, you’re taxed at a lower rate on your income above the £125,140 than on what you earn between £100,000 and £125,140. That’s because your personal allowance has been totally whittled away by this point.

The effective 60% marginal rate you’ll pay on the £25,140 chunk of income between £100,000 and £125,140 is far higher than official tax rates indicate.

If your income falls within the tax trap band, there’s a strong case for increasing your pension contributions by enough to reduce your taxable income to below £100,000. Rather than paying 60% tax on your income above £100,000 to HMRC, you’ll instead get generous tax relief on your extra pension savings.

Remember: you can put up to £60,000 into a pension every tax year.

The child benefit booby-trap

Got kids? There’s a similar effective hike in the marginal tax rate when either parent earns over £60,000 a year.

Child benefit is available to parents of children under 20. But this benefit is progressively withdrawn above the £60,000 threshold, via a fiddly High Income Child Benefit Charge that sees you repay 1% of your child benefit for every £200 you earn above the threshold.

For example, if you earn £70,000 – that is, £10,000 above the income threshold – then you would need to repay 50% of the full child benefit amount. (Because £10,000/£200 = 50).

At £80,000 you’ll pay it all back. (£20,000/£200 = 100).

Depending on how many kids you have – and hence how much child benefit you’ll be repaying – this could equate to an effective tax rate of as much as 56% on earnings between £60,000 to £80,000 if you have three qualifying children.

Again, you might want to see if you can increase your pension contributions to keep your child benefit whilst improving your long-term financial future.

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 tax payer

Let’s say you will earn £45,000 in 2025/26 from all sources. Your taxable income is £45,000 minus your personal allowance of £12,571.

So £32,429.

This means all your income is 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 works separately from income tax. But in practice it’s just an extra tax you pay on your earnings.

National Insurance comes with its own fiddly rules – and in recent years the Government has been prone to messing with them.

That’s 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 contentious than income tax rates.

The big news recently was a hike in employer National Insurance contributions (NICs) in the October 2024 Budget. From April 2025, the government reduced the threshold at which employer NICs become payable from £9,100 to £5,000 per annum and it raised the main rate of employer NIC contributions from 13.8% to 15%. To slightly ease the resultant pain on employers, it also made certain allowances that companies can claim a bit more generous.

The net result is a higher ‘tax on jobs’, as the tabloids put it. The Treasury estimated at the time the changes would raise an additional £24bn in revenues in the 2025 to 2026 tax year.

You don’t directly pay employer’s NICs. The company you work for does. But I’d say the chances of employers absorbing all the cost of these hikes without a hit to wages or job creation are remote.

At least the rates of NICs we pay directly were not changed in 2024, thanks to pre-election pledges concerning taxes on working people.

This arrested a pattern of messing around with NIC rates that has seen the goal posts move multiple times over the past few years.

Sidebar: a brief history of recent NIC changes

The main National Insurance rate for employees was cut from 12% to 10% on 6 January 2024.

The rate was cut again to 8% in April 2024.2

Yet it was only in 2022 that National Insurance rates had been hiked by 1.25%. Ostensibly this was to pay for the NHS and social care.

No wonder so few people have any idea where NIC rates stand today.

One recent-ish change was sensible, however. 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.

It was 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 salary	6 April 2025 to 5 January 2026
£242 to £967 a week (£1,048 to £4,189 a month)	8%
Over £967 a week (£4,189 a month)	2%

Source: HMRC

As discussed, 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 pay in return for some other benefit – usually extra 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 a self-assessment tax return.

In a sensible world National Insurance would be merged with income tax. This doesn’t happen because (a) supposedly the money raised is set aside for state pensions and other welfare funding (it’s not) and (b) no UK government wants to been seen setting an income tax rate that’s explicitly above 50%.

If you’re a masochist you can read more 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 hours a week. Economically speaking, I turned more to the right.3

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 by now then you haven’t got a clue.

Most of us care about what we get to keep, after tax. We’re not so preoccupied with how our taxes help to fund the NHS or to pay interest on the UK’s national debt – vital though all that may be.

So when we start working – and we start paying taxes – we’re shocked by how little of our pay actually makes it into our bank accounts.

Beyond the sticker shock

Knowing your tax bracket is about more than just stopping you from fainting when you see your take home pay, though.

Armed with your knowledge of tax brackets, you can be more strategic about adding money to ISAs and pensions.

As we’ve seen above, 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, for example.

Thanks to pension tax relief, you’ll sacrifice less of a share of your post-tax disposable income, while you’re also 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 actually explicitly lowered, despite inflation running above target. That move dragged millions more people into the higher-rate tax bracket.

National Insurance rates also rose for higher-rate tax payers. And the wheeze that cut the personal allowance on incomes above £100,000 was introduced at this time, too.

True, the additional rate of income tax was reduced from a short-lived 50% to 45% in 2013. And eventually both the personal allowance and the higher-rate tax thresholds were lifted.

But as we’ve seen above, they were later frozen until 2028. (And maybe they won’t be lifted even then).

In short, if you remember the arcade game Frogger, that’s a good analogy for the ever-changing UK’s income 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:

Source: IFS

You can see that the numbers paying higher rates of tax (yellow line) has hugely increased since 2009 – let alone 1990.

Perhaps that’s fine. You might even argue the rise in higher-rate taxpayers is a reflection of rising income inequality as much as frozen tax bands.

We can debate that another day. I’m just pointing out how things have been going – and what might happen next.

We just lived through a period of historically high inflation. After peaking in double-digits, inflation is still above-target at 3.5%. Yet both the personal allowance and the thresholds for higher-rate taxes remain frozen.

Unless the government changes course, millions more workers will be dragged into paying higher and additional-rate taxes over the next few years.

A higher calling

If you’re a higher earner wondering why you’re not feeling as wealthy as you think you should, higher taxes will have something to do with it.

Okay, and higher mortgage rates and energy and food bills since 2022.

(Not to mention hedonic adaption! But let’s stay on-topic.)

The truth is being a higher-rate tax payer no longer means you’re wealthy.

Yes, I’m aware that the median annual earnings in the UK for full-time employees is still less than £38,000 – well below the higher-rate bracket. Nobody needs to get on a soap box to shout at me.

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 your ISA allowance and/or a pension to shelter your savings as much as 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 allowed to pay up to £60,000 into a pension in a year without any tax penalties4, so there’s lots of headroom.

If you can cut your spending by enough to allow for very big pension contributions, then you might be able to get the higher-rate tax you’d otherwise pay entirely wiped out by tax relief. Depending on how much you earn, of course.

Such pension contributions accelerate the growth of your retirement pot. Just remember you’ll almost certainly have to pay some tax when you drawdown a pension income later.

Changes over the past decade have made pensions much more attractive. Even I, a former pension-phobe, would prefer to lock away some of my money for many years in a pension than to chuck it away by paying a 40% or 45% tax rate today – let alone an effective marginal rate of 60%.

The bottom line? Taxes are continuing to rise. Take cover, or take the pain.

Note: This article was updated in June 2025 with the latest figures for UK tax brackets, personal allowances, NICs, median pay, and more. Comments below may refer to old numbers. Please check the dates if unsure.

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. [↩]
Class 2 National Insurance contributions for the self-employed were scrapped that April, too, and the class 4 rate cut to 6%. [↩]
To be clear, I’ve no problem with a reasonable level of taxation, public spending, and redistribution. But back then I had no idea what was already being taxed and spent! [↩]
Or 100% of income, whichever is lower. [↩]

{ 79 comments }

Why small value is worth investing in [Members]

by The Accumulator on June 10, 2025

Fancy a whistlestop tour of the evidence that the small value risk factor is worth investing in? Who wouldn’t?

Small value is the market-beating factor that graces many a sophisticated model portfolio. Yet it’s long remained tantalisingly out of reach for UK DIY investors hankering after a simple solution.

This article can be read by selected Monevator members. Please see our membership plans and consider joining! Already a member? Sign in here.

{ 20 comments }

Weekend Reading: 100% stocks for life

by The Accumulator on June 7, 2025

The Investor is unwell, I mean on holiday. Definitely not too drunk to write his column this week. Nuh-uh. No way, Jose. Nope.

Hi! The Accumulator here. Just covering while my good friend The Investor is having a nice rest.

OK, links is it? I’ve got loads. Because we’ve been planning this for weeks. Sure have.

Anyway, one article that sobered me up this week is a penetrating critique of defined contribution (DC) pensions written by the esteemed William Bernstein and Edward McQuarrie.

They elegantly show that most people relying on DC pensions to provide for a successful retirement need:

Much higher savings rates than is commonly admitted
100% stock portfolios throughout their entire investing lives (accumulation and decumulation combined)
A dose of luck: in the form of a benign sequence of returns and average historical return rates (Woe to thee if you’re below average.)

The savings rates required to retire on a portfolio of low-risk assets (e.g. index-linked government bonds) are just not doable for most people. From the article:

Grim indeed: using historical data, our analysis shows that not until the savings rate approaches 25% does the saver have more than a 50/50 chance of success, and to approach certainty requires savings rates in the 40% range. Lower savings rates require a market return that has seldom been on offer.

To bring savings rates down to something half manageable, it’s 100% equities all the way:

It turns out, counterintuitively, that only one maneuver improves the success rate, and that’s a 100% stock portfolio both during accumulation and retirement.

Even then you need a 20% savings rate to push down your chance of retirement ruin to 4%.

How likely is it that the majority can achieve that? We’ve known for a long time that the median UK pension pot is ridiculously underfunded. And those who struggle to save likely face bleak retirements, or a working life that stretches far into old age.

Bernstein and McQuarrie’s prescription:

The current system doesn’t need more nudges; it needs dynamite and rebuilding from the ground up on the DB [defined benefit] model.

That isn’t going to happen here. Nor in the States. Indeed, the authors’ aim seems to be to push back against libertarian forces who seek to dismantle all forms of social insurance, and leave individuals at the mercy of the market.

Whatever you think of the politics, the underlying research paper by Bernstein and McQuarrie is a clear-eyed education in investing risk. Most of all, it relentlessly strips away the many myths that comfort us when we look at a global equities returns chart and notice that it’s done pretty well for fifty years.

Have a great weekend.

[continue reading…]

{ 58 comments }

FIRE-side chat: after the rollercoaster

by The Investor on June 5, 2025

A crackling FIRE, which an early retiree might be able to enjoy a bit more often

I’m delighted to say we have long-time Monevator reader ‘London A Long Time Ago’ doing her FIRE reveal this month. While our career paths are world’s apart, I was surprised by the echoes to my own perspectives on freedom, self-determination, and how fragile life can be. Few of us will be lucky enough to retire to the glorious beaches of Australia, but there’s still lots to mull over. Enjoy!

A place by the FIRE

Hello! How do you feel about taking stock of your financial life today?

I think it’s been a terrific opportunity to conduct an honest reckoning. I’ve benefited from the honesty of The Accumulator and other commentators over the past few years, so thank you!

Before we go further, I think it’d be useful to explain your Monevator username – you post by the name of London a Long Time Ago – for the context it will give to your life story…

Sure.

My first Australian job was at a merchant bank at age 21. But within 18 months, I was on a plane to London armed with a two-year UK working visa and $30,000 in savings.

London was easy to navigate. I organised an interview on the train from Heathrow, attended it in the afternoon, and started working the next day. I lined up an evening job at another investment bank where I was equally over-paid and under-utilised.

Lunch was free in a private restaurant at the first bank and the second bank paid for my taxi home. I lived in a hostel, and on Saturdays I copied my new backpacking friends and waitressed at a High Street Kensington hotel for the free breakfasts and fun.

Eventually life scaled. A futures and derivatives boss promoted me and offered a sponsorship deal, plus a pay rise in line with my extra evening hours. I dropped the excessive hours, and moved to a Holland Park flat with a latch key garden.

London was playful, exuberant, and safe – Conran restaurants, events at private member clubs, city bars, country off-sites, and bottles of Bollinger alongside other young, high-spirited colleagues.

How old are you now?

Do you have any dependents?

I live with a feline. She has the emotional regulation of a psychopath. I love her a lot.

The wriggly spaniel puppy in my Monevator avatar photo belongs to a close friend. My cat and I hosted this adorable canine recently, and despite the puppy fun we have never been so relieved to bid farewell to a guest in our lives.

Whereabouts do you live and what’s it like there?

I live in Melbourne, surrounded by parks and a short drive to the beach. I can walk to the Arts Precinct, ‘G’, the botanical gardens, the Australian Tennis Open, and the Grand Prix.

When do you consider you achieved Financial Independence and why?

2025. It’s taken a while to feel rich enough… I had to practice deaccumulation first.

What about Retired Early?

I retired in 2024.

A local’s view. I wonder why London A Long Time Ago ditched the Central Line and her 9-5?

Assets: super savings

What’s your net worth?

Over $2.5 million. (That’s Aussie dollars!)

What are the main assets that make up your net worth?

Over $1.75 million in shares, cash, and superannuation… Less than I wanted, more than I need.

The majority (more than $1 million) is held in superannuation – only accessible at 60 – split 80% balanced (includes bonds), 10% Australian, and 10% International.

Available funds include $400,000 in a diversified global ETF (separate bucket) and $350,000 (split between Australian ETFs/direct shares and cash), designated as burn money to fund most of the decade ahead.

Cash of $70,000 is available to spend at any time for any reason. I’m in year two of my drawdown phase!

Can you explain to those of us back in the old country more about this superannuation malarkey?

Superannuation – often shortened to ‘super’ – is Australia’s compulsory pension scheme.

Employers contribute at least 12% (from 1 July 2025). Mine was higher. Individuals are able to concessionally salary sacrifice up to $30,000 annually inclusive of employer amounts (paying 15% tax on these contributions).

There is a 15% capital gains tax on returns in the accumulation phase on balances up to $3 million, and 30% CGT on returns above $3 million. However there is nil tax payable if/when funds are converted to a pension phase.

Non-concessional transfers – often from a windfall – are capped at $120,000 per year. Individuals can contribute three years worth if their super is under a certain balance ($1.9 million).

As I noted above my superannuation set-up is 80% balanced, 10% International indexed, and 10% Australia indexed – with ten-year returns averaging over 8% in aggregate and for negligible fees.

What about the Australian State Pension?

A full pension – $29,874 singles or $45,037 couples – is available for Australians age 67 who fall under an asset cap ($314,000 for a single homeowner and $470,000 couple homeowners) with home values excluded.

This Australian pension effectively backstops any superannuation portfolio failure.

Essentially, albeit at the risk of over-simplifying two tests (asset and income), a part-pension is available should funds ever fall below $674,000 for single homeowners or $1.014 million for couple homeowners.

The value of the government pension is scaled progressively. Many people appear to structure assets to qualify for a part-pension, mainly because of other concessions such as a senior healthcare card.

The scenario for renters is a whole other story. Suffice to say it’s desirable not to fall into this camp.

What’s your main residence like? Do you own or rent it?

I live in a two-bedroom flat in a 1920s heritage building, purchased off-plan the same week I returned from London – more than 20 years ago.

My flat took two years to complete. I spent a year in Dublin while it was being redeveloped. It’s unique and stunning. I like it more every year.

Do you consider your home an asset, an investment, or something else?

I consider my home to be shelter. I moved in when I was 26-years old. I covered most of the purchase with cash, but it still took five years to pay off the mortgage (Interest rates were 7%).

I chose not to leverage or future-promise my energy again. However property is the most common wealth building strategy for most Australians. Thanks to former Prime Minister John Howard’s introduction of negative gearing, most of my peers own multiple investment properties.

Negative gearing dramatically boosts asset wealth, given the mix of leverage and tax deductions. It’s also contributed to high property prices, generational inequality, and rental insecurity.

In my case, renting somewhere comparable would probably cost $50,000 a year, with the spectre of a significant increase every two years – assuming the lease was even renewed.

Earning: at what cost…

What was your job?

I’ve experienced two disparate careers – finance and government – both within high stake arenas. My salary has generally hovered somewhere in the 80th percentile band.

Both careers were ostensibly glamorous. I worked for the best organisations and agencies in the best buildings, alongside clever, ambitious, highly efficient and self-directed colleagues.

Both careers provided money, networks, vivid memories and goal attainment, but they also exacted a toll.

First job first please!

My longest role in my first career was at an American investment bank.

Trading floors are high energy, high spirits, and banter, but Australia was a grotesque facsimile compared with London – misogynistic, amateurish, and ugly. I was objectified, even targeted and drugged at a work event, and was generally gas-lit by a veneer of civility into believing I could one day crack the bro-code.

I also had a front row seat to events described by Michael Lewis in The Big Short. The people most responsible for the disaster completely evaded its consequences, whereas my dad retired and his retirement funds halved a week later.

It took three attempts to leave this career path, as I was continually headhunted back. Eventually, my disinterest was total and irrevocable.

I then had a six-year career break. I would liken this juncture to a cerebral switch.

I don’t consider it burn out. But I had a profound disinterest in goal attainment, monetary success, and status. I floated around, googled ‘top 10 hotels’ and holidayed there, had spine surgery, travelled, adopted rescue pets, redecorated, and read books.

I also returned to university, worked part-time in a bar for a year (great job), and completed a new degree. I spent a few hundred thousand dollars from my savings.

But there was that second act to come?

My second career had a much higher bar to entry.

Overall, I’m grateful for my undergraduate degree, the skill set I gained and resulting tenor of my mind. Prized memories include golden moments enmeshed in certain teams. It is an incredible feeling to play a vital role in a cohesive team, amidst other teams within an overall architecture working in concert on something that desperately matters in time-sensitive situations.

‘I just don’t want that for myself anymore’ is a valid reason to stop anything. I’m glad I resigned.

What is – or was – your annual income?

I assigned my final role a $3.5 million value – using the 4% rule – to try to cheer myself up.

How did your career and salary progress over the years – and to what extent was pursuing financial independence part of your plans?

Financial independence has always been a high priority. I was laser-focused on attaining it but never at the expense of legality, ethics, sound principles, and justice.

Did you learn anything about building your career and growing income that you wished you’d known earlier?

Marx’s maxim that: ‘We are our means of production’. No one is exempt from the truisms about power, money, and influence.

Do you have any sources of income besides your main job?

In terms of the recent past, share dividends and interest.

My dad died this year. I will receive a gift after probate.

In terms of the distant past, I made money trading. I thought I had an edge. I stopped when I lost it. I still have carry-forward losses from being stopped out of risk I failed to monitor in 2011!

I’ve never traded since.

Did pursuing FIRE get in the way of your career?

No. It helped. I exercised the optionality it afforded on multiple occasions.

Saving and spending: simple but not simplistic

What is your annual spending? How has this changed over time?

My base spend is roughly $30,000 a year, split fairly evenly between:

(1) Fixed core costs – rates, body corporate fees (what you call service charges in the UK), utilities, insurances, and general home maintenance.

(2) Discretionary staples – food, restaurants, transport, gym membership, pets et cetera.

(3) Luxury expenditure – clothes and grooming, entertainment, redecorating, holidays.

I’m not tethered to this annual amount. If I want something, I’ll pay for it. But I already live well amidst beautiful possessions, so nothing is on my radar right now.

And you’re confident this will see you good for the foreseeable?

No!

My deaccumulation calculation is based on my birthday month – versus the tax or calendar year.

Year one spending (that $30,000) includes the final three months working and retiring in winter. I then spent my first four months re-reading comfort books. Holiday costs were negligible.

I expect my spending to rise or at least incorporate choppy big budget items in the future.

I’m already trying new activities, which is how I discovered Formula 1! (I would hate to calculate how many hours I’ve dedicated to Drive to Survive…)

However my expenditure has been fairly stable for the past five or so years because of work, related travel opportunities, and the fact that Melbourne was the most locked down city in the world during the pandemic (2020 and 2021).

Australia’s 22% aggregate CPI increase from 2020 barely impacted my core expenses, other than increases in grocery prices. This is probably because we have competitive insurance and communication providers, plus the Australian government has countered rising energy costs with household credits.

As UK utility prices appear high, it may be interesting to share granular costs in Australia, for comparison:

(1) Energy (electricity and gas) – $968 (five-year high $1,450 without government rebates)

(2) Water – $950 (stable)

(3) Telecommunications (top brand phone and 220GB internet) – $1,265

(4) Private health insurance (includes dentist, optometrist. and partial physio) – $1,700

As is the case with the NHS in the UK, Australians have access to enviable free medical care and we are able to pick and choose if and when to use private health cover.

Do you stick to a budget or otherwise structure your spending?

I don’t budget, but I do track data. My spending has always been significant in areas, but also negligible in aggregate. In both careers, I probably only ever spent $15,000 annually on luxuries.

In my first career, fun was expensed. Almost everything was free.

Aside from that, I grew up reading. That’s never changed (also it’s mostly free).

Parties, holidays, and restaurants barely move the needle, and anyway, I prefer my cat to travelling at the moment. And I’m Australian so of course I’ve already travelled extensively!

Are you using the 4% rule or some similar strategy to manage your drawdown and spending?

I’m using a dynamic approach. My current approach is to ignore superannuation (accessible at age 60) and aim to spend at least 4% of currently accessible funds (more than $750,000 when factoring in a six-figure sum I will receive from my Dad’s estate).

I’ve found it helpful to assign a fixed amount ($350,000) as ‘burn money’ and to think of the first couple of years as practice, because I predict my spending and personalised asset allocation will alter with time.

My $400,000 portfolio contains some favoured investments, so I’m also ignoring these for the time being. Mental gymnastics works for my neurology.

As previously mentioned, $350,000 is currently split between $280,000 in Australian ETFs and shares, and $70,000 cash. This allocation throws off more than $15,000 a year and I need another $15,000 for my current base spend.

I’m using cash, interest, and franked dividends in this portfolio to shield against sequence of returns risk. (A franking credit is an amount of imputed company tax. Fully franked dividends provide franking credits at the corporate rate of 30% to avoid double taxation. Australian ETFs provide partially franked dividends with proportionate tax credits).

I will use my inheritance to increase the Australian asset allocation within this portfolio.

My Excel calculation is simple – inflate annual spend, use cash, sell ETFs/shares as needed, and deflate interest and grossed dividends appropriately.

‘Seeing is believing’ in Excel. For instance, @TA has frequently commented that sequence of returns and the first annual withdrawal figure profoundly impacts a portfolio’s health and longevity. Market increases and my lower-than-expected first year of spending had a dramatic effect on the penultimate balance (even without the unexpected gift from my Dad).

Should I want something expensive, I’ll add it to the spreadsheet, the numbers will change – but for now, the bottom line is healthy despite the low ($350,000) starting balance.

My second column (more than $750,000) is currently outpacing spending and inflation, but perhaps a few big trips will change that at some point.

Deaccumulating has tax advantages. In my case, Australia has a tax-free threshold of $18,000, followed by 16% until $45,000.

As mentioned, a significant portion of my dividends attract imputation credits, so I receive a tax credit annually. Australia also provides a 50% capital gains discount on share sales. I’ll also ultimately be able to use those carry-forward losses.

What percentage of your gross income did you save over the years?

I only have net income calculations for my second career. In the first two years, my saving ratio was 36% and 29%. Savings then increased to 65% of net income, aided by Covid 19 lockdowns and salary increases.

What’s the secret to saving more money?

I found a dose of anxiety with a dash of comparative childhood poverty highly motivating. It took my parents a couple of decades to build wealth from scratch as émigrés.

Apparently, the best definition of ‘anxiety’ is a disturbed relationship with certainty. If so, I’ve greatly benefited from leaning into my anxiety!

Personally though, I fail to understand how anyone manages to escape anxiety in a neoliberal society, given the absence of safety nets and the political weaponisation of poverty. (See Robodebt in Australia).

Do you have any hints about spending less?

No, I find spending effortless if and when actions are congruent with values.

I believe in ethical farming practices and environmental protection.

I like expensive clothes and shoes, beautiful textiles, art, and some high-end goods, but I try hard to limit excessive consumerism and waste.

Australian food prices doubled in the last five years, but I’m a vegetarian, so doubling the cost of blueberries is not the same as the price of steak. I see no reason to economise on quality food given my low overall spending.

I enjoy the normal things, like new restaurants, but in my opinion real-life riches are much nicer than purchased riches. For me that means Zen walks, dog parks, silly fun with friends and their pets, the library, ocean swims, becoming a beach or pool lizard in summer, sunshine, and reading on a gloomy day with every lamp lit and my cat purring close by.

But do you have any particular passions or hobbies or vices that eat up your income?

I’m still finding my feet post-retirement. This year, I implemented a new ritual whereby I have to try something different and new each and every month.

So far I’ve been astoundingly unimaginative. For instance, getting tickets to Melbourne special events such as tennis (boring) and the Grand Prix motor racing (unexpectedly terrific).

I think my appetite for new experiences is going to burgeon with time!

Investing: a means to an end

What kind of investor are you?

Passive with a home bias tilt.

What was your best investment?

A bank share – Australia is a financial services economy.

Did you make any big mistakes on your investing journey?

Of course! As I said I still have carry-forward losses from 2011. I failed to monitor risk and was stopped out.

I also thought I needed $80,000 for spine surgery, and sold shares at a loss. At the time, I expected to privately fund my ‘elective’ operation after an insurer tried to limit liability and claim the operation was unnecessary. Ultimately, the surgeon and the anaesthetist refused payment, operated, made me whole, and waited for the arbitration case to settle in my favour. It took years, but eventually the insurer paid.

What has been your overall return, as best you can tell?

This question invoked a miasma of disinterest.

At some point, I stopped focusing on metrics and building a perfect portfolio.

I stopped caring ‘how’ – I just feel gratitude and relief that I did!

How much have you been able to fill your tax shelters?

I always salary sacrificed the maximum amount each year into superannuation for the tax concession.

To what extent did tax incentives influence your strategy?

I over-saved in superannuation. The tax incentive explains why.

How often do you check or tweak your portfolio or other investments?

I check monthly when I move funds around to pay bills.

I’m interested in politics, economics and global markets, but less interested in my own portfolio now that I feel safe. I’m busy trying to build ‘life’.

Wealth: …and health

We know how you made your money, but how did you keep it?

I built in stacks: cash, share trading, then property, then shares (in different configurations), then more cash.

I used leverage sparingly and only infrequently via derivatives, so I never risked the bulk of invested funds.

When I needed to exercise optionality, I spent reserves freely as needed, and then rebuilt.

Which is more important, saving or investing, and why?

Saving was key initially. London super-charged my net worth.

I’m pretty sure I earned £45,000 annually in my early London years – including a few thousand extra a year AUD trading. I invoiced as a company.

When did you think you’d achieve financial freedom – and was it a goal with a timeline?

I was trying for conventional financial freedom in career #1, but I couldn’t sustain the effort. I spent a stack of savings in my six-year sabbatical, and had to start again during career #2, although not from scratch.

I was aiming for at least $1 million outside superannuation the second time around. I’m inordinately grateful that I obsessively read Monevator. The Accumulator and The Investor plus commentators were all a positive influence for different reasons. (All errors are my own, of course).

I’m aware I fell short of my financial potential and my achievement-oriented peers. But I feel successful based on my own metrics.

In my opinion financial freedom and good health need to be paired together. I shortened my financial freedom timeline (to a bare bones finishing line) because my health was objectively at risk.

Superficially, I’m glad I left before I acquired dark circles under my eyes – and wrinkles and grooves in my face mapping my unhappiness – or bowing my posture.

I resisted or at least limited using alcohol as a crutch. I stopped SSRIs the week I resigned.

Did anything unexpected get in your way?

Spine surgery because I have always been healthy. My surgeon promised to make ‘me whole’ and he did! I was pain-free from the moment I woke up.

Are you still growing your pot? If so, how? If you’re de-accumulating, how?

I’m still figuring out my post-work ‘life’ and its impact on deaccumulation, hence I’m reading @TA’s No Cat Food posts.

I’m a vegetarian, so cat food is not an option anyway…

Do you have any further financial goals?

It’s too early to say. I’m still quite young. In the future, I might choose to work for a purpose, so I’m not ruling out another career? But presently I can’t fathom in what field.

I’m hyper aware that I should maximise this decade and accomplish travel-related goals – while I’m healthy – and later determine whether I want to restructure my financial assets into a higher-value principal place of residence (PPOR). This is because it costs at least $1 million for high-needs care in a 7-star facility (present day terms), and a PPOR makes an excellent tax and pension-exempt store of wealth and inflation hedge for this purpose.

It also makes sense to maximise this decision on that grounds that I seem to have become a homebody.

You’re quite young to be (sensibly) thinking about later life care…

Dignity in aged-care is purchased, not automatically provided.

The nursing care and level of kindness displayed by staff members to both my parents has been largely exemplary. However the difference in aesthetics, activity options, and chef-prepared meals between a $600,000 and $1 million option is stark.

Hopefully I’ll be healthier than my parents, but I will actively plan for this contingency.

In Australia, aged care is means-tested, but very reasonable for high-needs care. Most individuals choose to pay a bond, which is returned to the estate with a minor surcharge deducted (only recently legislated, so grandfathered for existing residents).

Individuals also pay a monthly fee, but the total lifetime amount payable is capped.

What would you say to Monevator readers pursuing financial freedom?

People reading Monevator will almost certainly pursue their goals with greater élan and resilience. My inner animal was howling and gnashing its tail. I feel an ocean of relief that it’s done.

I was deeply affected by my Dad’s diagnosis. His form of Parkinson’s disease progressed slowly over more than 17 years. He spent his final three years in a high-care facility. He became non-verbal in his final year, so we were slow to spot that he was suffering extreme oral pain. The diagnosis – tongue cancer – added an incomprehensible level of indignity, pain, and cruelty to his final months of life.

His death in palliative care was agonising. He died minute by slow minute over a week.

The enormity of his diagnosis and death were impactful. Time matters. I have enough money now, so I’m going to prioritise friendships, good deeds, interesting books, my calm mind, and a clear conscience.

In the weeds: doing it for yourself

When did you first start thinking seriously about money and investing?

I always cared about money. I wanted economic freedom even in adolescence, which felt stifling.

Politics, markets, and health diagnoses can disrupt even orderly lives. I wanted to be prepared.

Did any particular individuals inspire you to become financially free?

My friends were high achievers and one by one chose marriage and motherhood over careers. None of us define success through corporate or material stakes.

I wanted financial freedom on my terms and achieved it without a partner.

Can you recommend your favourite resources for anyone chasing the FIRE dream?

Aside from Monevator, Money Flamingo for its original premise – save half your desired FIRE amount, then coast for ten years while investments compound and double in the background – and Weenie’s site for her self-reliance, honesty, and determination.

What is your attitude towards charity and inheritance?

I’m inordinately glad that I achieved independence on my own for my self-esteem.

As I mentioned, my dad left me a bequest in his will this year. It felt like a written declaration of love, particularly because he was unable to speak verbally in the end.

My view is that life can be hard and uncertain, so an inheritance is a valuable stepping-stone or safety net, particularly for the generation behind me. My sibling and I will most likely receive a legacy each from my mother’s future estate.

I’ve named the Sheldrick Trust and an Australian sanctuary as beneficiaries in my will, with my sibling prioritised in the first instance.

What will your finances ideally look like towards the end of your life?

I feel as though I’ve been taking stock since retiring unexpectedly early in 2024!

It has taken months to decompress. I would say the prize has been peace and a truly calm state of mind. I feel happy, optimistic, and alive to the infinite possibilities ahead.

My ardent hope is to remain kind, empathetic, and happy in my senior years. I envisage ‘future-me’ funding worthy causes from the pool deck of a Richard Osman-esque retirement complex surrounded by my sea of rescue pets and quirky friends.

Thanks to London A Long Time Ago for a thoughtful and revealing interview. I specially liked the idea of the ‘burn fund’ as a forcing function to switch from an accumulation to drawdown mindset. Do let us know your takeaways in the comments below. Please remember that constructive feedback is welcome, but anything bad-tempered or nasty will be deleted. And be sure to read our other FIRE-side chats.

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