Marginal tax rate

[maxi2]

My annual income makes me a high rate (UK) tax payer with a marginal rate of 40%. However I am paying over 50% of my income into a pension fund and as these payments are out of pre-taxed income, I am now only paying 20% as a top rate of tax.

By definition, does this mean my marginal rate is 20% or does the original income figure still dictate a marginal rate of 40%?

[dundurn]

I would have said your marginal rate was 20% since that's what you're paying. The rate you would have paid but for your pension payments is irrelevant. I assume this is a personal pension since occupational schemes have a ceiling for tax relief at 15% of annual earnings.

[maxi2]

Dundurn, thanks for your response. Most of my contributions are going in AVCs. I tend to agree with your answer but I suspect the IRS have their own definition!

[Hymie]

I wish that I could afford to live on 50% of my salary � I�m currently struggling to manage on 100% of it.

Although you may be saving yourself paying 40% tax by paying into an AVC scheme, you need to be clear about exactly what you receive in return. Many AVC schemes turn out not to be the great investment scheme you were sold � but a nice little earner for your company pension scheme/insurance company.

If the AVCs are used to buy an annuity, you might be better off seeking an alternative investment strategy.

I am currently in a money purchase pension scheme � when I retire, I will buy an annuity with the pension pot (may be getting a return of 6-7%p.a.). Once I die, the pension company get to keep my pension money.

[factor-fiction]

You can take a good chunk of the AVCs as cash, tax free. With the 40% tax relief on the way in AVCs are a good deal, although of course, like other investments, they are vulnerable to stock market crashes.
I agree the marginal rate is 20% but dpending on the figures it could become 40% again if your earings increase.

[maxi2]

Thanks for your answers. The purpose of these AVCs is to maximise my tax free lump sum entitlement - there is no annuity involved and the money is being invested in a cash fund so there is no risk. My original question regarding the definition of "marginal tax rate" is for another unrelated purpose.

[Skyline D]

The marginal tax rate is the rate your next pound of income is taxed at.

It would appear in this case that's 20% (though it wouldn't be if you're right on the cusp of 40% and your next pound takes you into it).

Individuals can't really have a marginal rate anyway since you simply pay tax at the next band according to your taxable income. Your marginal rate and your actual rate are the same thing. Companies have marginal rates because when they go from small companies rate to full corporation tax they pay the whole lot at the full rate and then get marginal relief to partly offset that.