This is Why Doctors Overpay Tax Every Year

Do you want to pay tax now or in 20 years? I'll prefer 20 years, especially when the government is generously giving me 25%. You've got like pension growth already of 30K, which is your contribution, your employer's contribution adjusted by inflation and all that stuff. But then you go into your SIP, you put in 20K and the government is giving you back 5K because the government is your daddy. We don't believe that. You can sell all your stock and shares ISA tomorrow and take your cash and run. With a pension, you have to wait to your pension age. Now, if you are a higher rate taxpayer, that means the portion of your income that's above £50,271 is taxed at 40%. If you're like married and we've got a kid, if I earn £59,900 and you earn £59,900, guess what? We haven't crossed £60k, right? So we're entitled to child benefit without having to pay the high income charge.

How does this, like, when you pay for ISAs, how does that adjust your net salary? Because what my understanding is, you are paying for ISA. I don't think we can put like ₹20,000 in ISA and you can like say, okay, I have paid ISA and you can— it wouldn't reduce your net income, is that right? Only that the interest what we get out of that amount is tax-free.

You are 100% right, Nimi. And that's where people mix it up. There is no— ISA doesn't affect your adjusted net income. The money you put into your ISA has already been taxed. It's money that's already been taxed. The money you put into your pension, if it's deducted directly at source, it's not been taxed. But if it's been taxed and gets into your pocket and you take it out of your pocket and put into your pension, HMRC would say, no, we shouldn't have taxed it, let's give you back. That. So that affects your adjusted net income, and also you get that, you know, tax back that you can invest. So I'm not saying ISAs are not a good strategy. I'm just saying if you're a higher rate taxpayer, you're investing money you don't need now, you don't need before you're 57 or 55— it's 55 now, but in 2028 the SIP age will become 57 when you can get your personal pension— if you don't need that money anyway till that time, I would rather use my personal pension Why? Because in that case I get that tax relief and there's still no tax on it. And someone would say, well, with ISAs, whatever you return, you eventually make. If you're using stock and shares ISA, it's never taxed, right? That's a fair argument. But with pensions, you're not taxed till you draw it. And when you draw it, 25% of the entire pot is totally tax-free. So if your pension pot is £1 million, you can take £250k tax-free entirely. And the remaining 750, let's just call it the 75% pot and 25% pot. And if you do this in a very smart way, you can draw 25%. You don't need to draw all the 25%. You can just come and draw 20K tax-free pot. Remember, 250K here, tax-free. You can take 40,000 there, and there's no tax on it in a year. And then you go to your 75% taxable pot is £750K. How much do you think you need from there? Or if you don't want to pay any tax at all, how much should you draw? It's not, it's not a fair question because I've not said anything about it, but some of you in the mastermind know. How much can you draw? We're getting a bit advanced here. Let's say Nimi ends up with, after investing this money in her SIP, she does quite okay, she ends up with £1 million in her pension pot. She says, I'm done, I'm 60 now, I just want to withdraw it. Okay. She doesn't start at 57%, she starts at 60%. So she goes to this pot is 25%. This pot is 75%. 25%, zero tax. 75%, taxable. Let me give you the clue. It's taxed as your income. So it's taxed like your income. How much would you withdraw from that 75% pot to not pay?

12,500 and some.

She's good, isn't it? So that's the point. This is the, I try to get this point across to many people. What happens? They're thinking about tax. Oh, I'm eventually going to pay tax in the future. Oh, I'm a venture— do you want to pay tax now or in 20 years? I'll prefer 20 years, especially when the government is generously giving me 25% tax-free, and then I can decide how I draw this money. Because some years you might want to splurge, you want to go to Japan or go to a world tour, you just need more money. Then you can take 50K from there and just pay whatever 20% tax you have to pay. This means you earned this money when you were a 40% taxpayer, but now you're paying 20% and it's not really even 20% when you've already taken 25% of the pot tax-free. Does that make sense?

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I think I've gone on a bit of a rant now, but that's what happens when I talk about taxes and investment. Mimi, did that help? Yeah.

Okay.

All right.

Um, when you say like, okay, you have like You're, you're putting the $20,000 into pension on SIP and HMRC is going to give back $5,000. That's what you said. Will that $5,000 comes back into your net income or no?

No, it's not going to come back into your net income.

It won't add up your net income.

It will just reduce. So if you put in $5,000, remember what you did is $20,000. That $20,000 has gone out of your net income. That's gone into SIP, so it's out of your net income. When they pay you £5,000, it's not going to come into your net income. It's now pension. That's money for the future. You've got it. Beautiful. And just like I was saying to Omar, if you draw back the £20k from your, from your self-assessment, that doesn't also go into your net income. So let's go back to our checklist. We've done the biggest, the biggest bit, A, personal allowance. The next allowance is pension allowance. We've already touched on this a lot. How much is the pension allowance? Tell me in the chat. I know you know. How much is the pension allowance? This is a tax trap. Some people jump into this tax trap not knowing about it. Pension allowance, 60K. Thank you, Ada. Thank you, Favour. Yeah, I can see. Good. So 60K Sunday, that's good. So we all know. So that's 60,000, all the allowance you have. This is where a lot of consultants struggle. And no matter number of times I've tried to explain it in our free community, they don't seem to get it. Somehow you guys in Tax Hack get it. And sincerely, I'm doing my best to explain it even on videos. What's that? $60K is all the money put into your pension, including any government tax relief. Okay. What about— is that in a year? Thank you. That's per tax year. Very key fact. A tax year. And when does the tax year start? April 6th to April 5th. Okay, that bit we already know. Before I jump ahead, just want to make things clear. You know that 12,570 and below, you pay no tax. From 12,570 to 50,271, you're paying how much? 20%. Thank you. If you factor in NI, you get closer to 25%. Thanks, Andy. So that's what we call the basic rate taxpayer. This is the point where Ola is shaking his head vigorously and saying, Andy, Scottland has a different tax regimen. Yes, Scotland is slightly different. That's why I put the table in my book. But yeah, 20%. Now, if you are a higher rate taxpayer, that means the portion of your income that's above £50,271 is taxed at 40%. That's all clear. I'm assuming we understand that. But if you're not clear on that, just stop me, raise your hands, and we'll deal with that. Now, you remain on that same tax, 40%, until you hit £150K. Now at £150K and above, it's 45%. That's what HMRC tells us. They just say nothing about that 60% effective tax rate. I mean, they say it, but it's written like it's Spanish for those who don't understand Spanish. Like, okay, you lose your adjusted net income, so you're effectively paying 60% tax rate. Okay, so that's the tax tables, everyone. Whatever you're doing, always be thinking about where is the threshold? Where do I cross before I lose something? We've already talked about the tax tables. We've already talked about £60K. £60K is when you lose child benefit, which is very— I don't want to say silly, but the law is an ass sometimes. If you're like married and we've got a kid, if I earn £59,000, £59,900, and you earn £59,900, guess what? We haven't crossed £60K, right? So we're entitled to child benefit without having to pay the high income charge. But our joint family income is £118,000. Help me make sense of this. But we haven't crossed it. Now, let's say if Sunday— I'm just giving an example— if Sunday was the only breadwinner, I was— let's say he's a stay-at-home dad and he's earning £0. But Sunday, Mrs. Sunday, Miss Sala, who is earning £62,000. Now they have to pay some of that high income child benefit charge because now they've crossed £60K, despite the fact that their next-door neighbor earns £118K as a couple. Don't ask me, that's the law, that's how it is. Once you understand it, you use it in the best way. What could Sunday do? He said, nope, I'm not losing my child benefit charge. I'm going to take that extra £2,000 in my adjusted net income. Remember, it's adjusted net income, not his gross salary. Oh, you remember I talked about this. He could take that £2K put it into salary sacrifice or put into SIP basically, and that drops his adjusted net income back to $59,000 or $59,900, and he gets back his full child income, child benefit, and there's no charge. The same thing we applied at $100K, you can apply that stuff. Um, the same thing if your gross income or you're just— sorry, your adjusted net income is above $260K, I think, look, I'm about to lose some of my pension allowance of £60k. You could do the same thing. You could reduce your adjusted net income. Okay, so this is a good place for us to look at pension allowance. It's £60k. Your NHS pension is already contributing money to your pension allowance, so that's deducting part of that £60k. Let's say you're getting 12.5% of your salary paid in there. It's a defined benefit scheme. It's not a straightforward calculation. It's usually adjusted for inflation. So if you want to know how much that you've contributed to your pension, what they use is something called pension growth or pension impute amount, which we'll discuss along the line also in the group. The simplest way to get it is not the quickest way to write your pension administrator to say, how much was my pension growth or my pension impute amount in this tax year? So they will tell you how much has gone into your pension, or how much your pension has grown. So if your pension has grown by, let's say, $15,000 in the tax year, how much pension allowance do you still have left? Tell me in the chat. This is just to make sure we're all still on the same page. Fantastic. Okay, $45K. So you guys are following. Now let's say you then go ahead and put £20,000 is a trick question, but try it anyway. If you get it, that means good. I'll explain it. You've got £45K allowance. Now you put in £20,000. If your pension growth in the tax year was £15,000, and then you put in £20,000 into— sorry, say £15,000. We're assuming that your employer contribution was another £15,000, and altogether your pension growth was £30K. So you've got $30K left. Okay, let's factor that in. If you've got $30K left and you put in $20K into your SIP, what happens when you put that $20K into your SIP? What happens? Um, you get $5K. Excellent. The government says, Sunday, here's your $5K. That is part of that, you know, because that $5K is part of your pension allowance. It's not part of your adjusted net income. We establish that, but it's part of your $60K. So by— you've got like pension growth already of $30K, which is your contribution, your employer's contribution, adjusted by inflation and all that stuff. That is a different discussion altogether. So, but then you go into your SIP, you put in $20K, and the government is giving you back $5K because the government is your daddy. We don't believe that at all, but basically sometimes if you do what the government wants, they give you something back. So now it's 25K you've got there in addition to your 30K, so you have 5,000 left. Does that make sense? Yes. Is this puzzling to anyone? Just raise your hands, let's deal with this. This is really important. Ada has got it, lovely. That's why money that goes to your pension— one of the downsides of pension versus stock and shares ISA— you can sell all your stock and shares ISA tomorrow and take your cash and run. With a pension, you have to wait to your pension age. That's the idea. But many people investing in their stock and shares ISA have no plan of accessing that money till they are 57. So why not use the pension instead? Use your cash ISA for your emergency fund if you want, you know. Does that make sense? Yeah.