Five money problems that are nice to have (and how to solve them)

Sharing some problems will always inspire a symphony of the world’s smallest violins. With so many people struggling with job losses or rising prices, it’s hardly surprising that you might not be keen to share your worries that you’re earning too much money or have too much in savings.

However, just because something is a nice problem to have, it doesn’t mean it’s not really a problem at all. So it’s worth examining the issues that you can run into at the upper end of the income and wealth scale, and the steps you can take to protect yourself from the downsides.

1. I’m earning so much I’m paying 60% tax

Crossing the threshold of earning £100,000 forces you into a horrible tax trap, because at that point you start to lose your personal allowance. For every £2 you earn between £100,000 and £125,140, you lose £1 of your personal allowance. By the time you earn £125,140 you’ve lost the lot, so on that chunk of your salary you effectively pay 60% tax.

To make matters worse, if you have children, once you cross this threshold, you lose government support for childcare. This includes all entitlement to tax-free childcare, worth up to £2,000 per child per year, all of the 30 hours funded term time childcare for 9-month to 3-year-old children and half of the 30 hours for children aged between three and four. For someone with two children that might be worth more than £25,000 a year.

You can take steps to bring yourself below the threshold. When you pay into your pension, it comes off what’s known as your adjusted net income – which is what’s used to calculate your eligibility for childcare support. It means some people can boost their pension contributions, build a better retirement, and bring themselves back off the edge of the cliff at the same time.

2. I’ve had a huge bonus, and now I’ve paid too much into my pension

Very high earners can fall foul of the tapered annual allowance for pension contributions. This kicks in when you pass two thresholds. The first is ‘threshold income’ of over £200,000 – this is usually all your taxable income minus your personal pension contributions. The second is ‘adjusted income’ over £260,000 a year. This is essentially all your taxable income plus all your employer pension contributions or the amount your defined benefit pension has grown by.

If you fall into this bracket, the most you can pay into your pension is cut by £1 for every £2 you make over £260,000. If your income is over £360,000 it falls to £10,000. It can’t go lower than this.

Let’s say, for example, you have taxable income of £200,000 a year and pay £30,000 as a personal contribution into a pension. It means your threshold income is £170,000, so there’s no taper.

If you get a bonus of £50,000 on top of that, your threshold income is £220,000 so you’re over £200,000, but your adjusted income is £250,000, so there’s still no taper.

But if your employer were to pay you a further £30,000 in the form of an employer contribution to your pension, your threshold income would be £220,000 and your adjusted income would be £280,000, meaning both thresholds were breached.

£280,000 is £20,000 above £260,000, so your annual allowance reduces by £10,000 to £50,000. As you have put £60,000 into your pension you usually need to pay income tax on £10,000 – called an annual allowance charge.

If you have already paid more than your tapered allowance into your pension, check if you maxed out your pension in the previous three years, because you may be able to use the carry forward rules to wipe it out. However, the way to protect yourself is to plan ahead. If you expect a bonus, you may want to leave pension contributions until later in the tax year, when you know exactly what you have earned. If your allowance has been tapered, you can use alternative investment vehicles, such as your ISA.

3. I’ve maxed out all my tax-efficient allowances and don’t know what to do with the rest

Everyone has an ISA allowance of £20,000 and a pension allowance of up to £60,000. This is enough for most people in most years, but there may be times when you have more to put away.

If you’re keen to put more into your pension, check whether you maxed out in the previous three years, because you may be able to use pension carry forward rules to put more into your pension.

It’s also worth considering the allowances of your family. If you’re married or in a civil partnership, you can transfer assets without triggering a tax bill, so you can both pay £20,000 into your ISAs.

Children under the age of 18 also have a Junior ISA allowance of £9,000 which you can pay into each year. For pensions, most people have an allowance of £60,000 or their earnings – whichever is lower. For non-earners, the allowance is £2,880 – topped up with tax relief to £3,600. It means you can pay into the pensions of children and non-earning spouses. You can also top up the pension of your earning spouse. A married couple earning over £60,000 each with two children under 18 could put away £185,200 tax-efficiently in the current tax year.

Beyond these tax wrappers, your next step will depend on the size of your portfolio and your attitude to risk. For those who want to stay down the lower risk end of the spectrum, low coupon gilts may be an option. Buying and holding to maturity means most of your return will be a capital gain – and gilts are free of capital gains tax.

For a lot of people, a sensible next step is taxable accounts, whether that’s savings or a general investment account. You will need to manage them tax-efficiently, including taking advantage of your annual capital gains tax allowance.

For those who are comfortable taking more risks, who have a large a diverse portfolio already, tax-efficient vehicles for smaller company investments – like Venture Capital Trusts and Enterprise Investment Schemes may be worth considering. These are high risk investments for experienced investors, but they offer growth potential and some great tax perks.

4. I’ve got too much cash to manage

The Financial Services Compensation Scheme (FSCS) protects the first £120,000 you have saved with each financial institution, if something was to happen to the bank. If you have more than this in savings, and you want to gain maximum protection, you may need to spread it across accounts with different institutions.

Bear in mind that there can be a large number of brands within each institution, so you need to be careful about crossover and check if they operate under the same licence. 

It can be a headache to keep an eye on your savings when it’s scattered across different accounts, but there are a couple of possible solutions. One is to consider NS&I, where all your money is protected by the Treasury. The downside is that it won’t offer the best rates on the market. The other option is a cash savings platform, which lets you spread your cash among a number of providers very easily – and keep an eye on it all in one place too.

5. I’ve inherited a fortune and I don’t know what to do with it

This can be particularly tricky if the person who passed away had a plethora of savings and investments, and you’re starting from scratch. The key is not to rush into anything. Start with your needs – and any holes in your finances. This can mean paying off expensive short-term debts, paying for vital insurance cover, building a sensible emergency fund, and topping up your pension to close any shortfalls in your retirement income.

This can also be an opportunity to get on track with life’s milestones. This could mean buying your first home or making vital changes to your property. It could mean helping your children onto the property ladder. In some cases, it will also mean paying the mortgage off – depending on how manageable it is and what other priorities you have.

It’s then a chance to build for the future, through investments. If these are already in place, and you’re uncomfortable managing big sums of money, it can be one of the times in life when it’s worth talking to a financial adviser. However, you can also take it one step at a time. You can learn the basics of investment, get to grips with the portfolio you have been left, understand your objectives, and then assess whether it meets your needs or whether there are changes you need to make.

When you inherit, the money might also come with emotional baggage. You might worry about spending money that a relative has been building for decades, or selling investments they strongly believed in. There are times when their wishes will be important. If they left you this money and insisted you spend at least some of it filling holes in your pension, you know it’s what they would have wanted. However, this is your money, and these are your decisions. It’s vital not to let a sense of duty stop you from making the decisions that are right for you.