Punitive rates of marginal tax can be mitigated with a bit of planning.
For example, take the case of someone earning £50,000 – the level at which child benefit starts to be withdrawn. This benefit pays £1,133 a year for a first child, £751 per additional child.
You get no child benefit at all once the gross salary of the highest earner in the household hits £60,000.
In this case, if you have three children, that means a marginal rate of tax of 68 per cent on income between £50,000 and £60,000.
You could try to work more hours and earn another £5,000 a year to make good the extra tax you have paid. But you’d only keep £1,600 after tax (and, of course, working overtime might not be an option).
Instead, you could use an employer’s ‘salary sacrifice’ scheme and put the £5,000 into your pension pot.
You would then pay no income tax or National Insurance on the £5,000 – while your employer would pay no employer National Insurance, saving it £690 – 13.8 per cent of £5,000.
If your employer is feeling generous, it could put the £690 it has saved in tax into your pension pot. So, instead of retaining just £1,600, you keep £5,690.
It may look like a win-win, but the downside is that you can only access this money when you retire. Dan Neidle, of Tax Policy Associates, says: ‘Many people would regard it as a good deal, but it is a stupid result. You’re being forced into a suboptimal choice.’
> How to invest in your work pension and the tax benefits from doing so