Money Matters - Earn More Money, Pay Less Tax

By Shelley Mackay

Aug 21

I'm going to show you how to earn more money and pay less tax, sound good?

You're all probably sat out there thinking, because everybody does think this, the more money I earn, the more tax I'm going to pay. And I understand exactly why you would think that because that's how you're trained to think. You are trained to believe that once you earn more money, then you can earn as a 20% tax payer, you pay 40%. And then when you go over 150,000, whoa! Now you're going to pay 45% and you're going to lose all your allowances. And you're going to carry on paying national insurance, you're going to be paying 53% tax at that point.

You're actually now not working for yourself or anybody else, you're working for the government because you're giving 53% of your money to them, and I don't want you to have to do that. It's your legal obligation to pay the correct amount of tax and set the appropriate measures to optimize that tax. I'm not talking about tax avoidance or tax evasion, I'm talking about managing it. If you don't have the tools, you can't. So this isn't a complete everything you need to know about tax, this is specifically what you need to know to make sure you're not paying too much tax. So, I'm going to take a situation where we've got a person and they've got a job, but it could be a job or it might be that they've got, they're self-employed but they're paying some sort of national insurance and tax based on an income. But for the purpose of this, I'm just going to assume it's PAYE, but it could be if they've got their own business as well. And I'm going to say this person, we're all different, aren't we? I'm going to say they've got £60,000 PAYE, pay as you earn. So that's going to put them into the higher rate tax bracket, they're going to be paying 40% income tax, they're going to be paying national insurance, they've got various taxes. So what they take home, this is a nice simple number to work with in the sense that it's five grand a month. And it's more than twice the national average, so if you're sitting out there listening to this and you are earning £60,000, well done! Because you're actually earning double, more than double, the national average. But you will know if you get paid £5,000 a month, by the time it actually gets into your bank account, it's an awful lot less.

I can't tell you precisely what this is going to be because you're all going to have an individual tax code. Now that tax code is the amount of money that you're allowed to earn before you pay tax, and it's got various factors in there, so you will have an individual tax code, and it'll just say it. It'll like end in a K or something and it'll be on your payslip. So you'll be able to see all of these numbers. So the first practical exercise that I want you to do is I want you to go and get out your payslip and make sure you understand it. Because it'll have all the entries on it and if you're getting given an amount of money every month but you don't know what it means, and if you're just focused on your gross and your net, and if you just know that you're on £60,000 a year and you take home 3,500 or something, or 3,200 or whatever it is, I know you'll know those numbers because that's what hits your bank account every month. But I need you to understand it more than that because I want you to split out the various kinds of taxes you're paying, and I want you to understand why you're paying them. Because income tax is something that can be managed.

National insurance, which I just realized I haven't finished there, I don't actually regard national insurance as a tax. And I would want to go out of my way to make sure I did pay my national insurance. More of that later, but in order to get your old-age pension, you actually have had to have paid your national insurance for a minimum number of years, and the more years you pay it for, the more pension you get. So national insurance, for me, isn't really a tax. You're paying money now so that you can have a pension, a state pension, in old age. So this is all happening over here, and you've got it on your payslip, so your first job, get out your payslip and make sure you understand the various types of tax. Now, what we're going to do next is we're going to go and start to buy some houses, we are going to have a property business, and this is my first and strongest advice, make sure you understand the tax implications of whatever you're doing with property. Because properties can, very quickly, start giving you significant passive incomes, and if you don't know how to manage the tax implications of that, you're going to end up paying far too much tax. And I'm sure you'd agree with this, it's not about what you make, what your income is, it's about what you keep. Like they say in golf, for instance, you drive for show, but you actually putt for dough. So it's not about the big flashy, top line number, oh, I'm on £300,000 a year, that's not the correct way to measure it. The way to measure it is well, how much money goes in your bank every month after you've paid for all your taxes and insurances and everything else? So for the sake of this example, I am going to say that we've got a property business, and I am going to say that we've got a number... I'm going to pretend that you've been doing this for, I don't know, four or five years, and so you're maybe four years into your property business, and each year, you've done the courses, you've had the education, you've learned how to do it, and each year you've bought two houses, or flats, or something, or whatever. And then, as you got more advanced and you understand there's more options. See, by the end of four years, you've got eight buy-to-lets, but you've also done a couple of commercial deals, so I'm going to say they're shops, but you've only been doing that for two of the four years. So you've got eight buy-to-lets and you've got four shops. And I'm trying to be very realistic here because if you've been a property investor for four years, is it possible that you end up with eight buy-to-lets and four shops, you bet you it is. So what kind of money are they going to be producing? How should you own them and how should you manage the tax?

So for buy-to-lets, I want you to seriously consider putting them into a limited company. So in your limited company, you've got your eight buy-to-lets. Hope you're following all of this. But shops are commercial. These are residential, so if hear people talking about resi, they're short-handing it for residential. So what they mean by residential, they mean where somebody lives. So a flat or house or a HMO, something like that. But then separately, I actually want you to have a pension that owns the four shops. Now, for the sake of this argument, I actually don't mind whether this pension is a SIPP or a SSAS, and don't get yourself all het up about that, these are just two different kinds of private pension and I'm not going to talk about that today. Just going to keep it nice and easy. But you've bought four shops, you've put them in there. Now, in terms of money, what are the buy-to-lets doing? Well, the buy-to-lets I'm going to say are producing an average of £250 a month each. So you've got 250 times eight, which is £2,000 a month. There's obviously 12 months in a year, so your buy-to-lets are producing an income of £24,000 a year. That's profit after all costs. So you've taken in some rent, you've paid the mortgage, you've paid a letting agent, you've done whatever you need to do, and after everything, it's realistic to expect a buy-to-let to give you about 250 quid a month. But you've got eight of them. And you might be off on some other strategy like you might doing service accommodation, you might be doing tenant buyers, you might be doing rent-to-own, but I just want to keep it dead simple for today. You've got £24,000 a year profit from that limited company. In addition, you've got four shops over here, they're just nice little shops. What they're doing is they're producing £1,000 a month, each, but you've got four of them, and that's giving you £4,000 a month, or £48,000 per annum. So, suddenly, you've gone from just having £60,000, you've got an extra 24 grand of profit from your buy-to-let business, and you've got £48,000 a year in your pension. Does that sound like a nice place to be four years from now? And do you think you need to know how to manage those income dreams so you don't pay too much tax? And would you be somewhat shocked to learn that if you manage this properly, despite the fact that you've actually got more money coming in, you can actually pay less tax over here? Because most people think they're going to do some properties on the side or whatever, they never actually think, in my experience, well, how can I use all of this to reduce my tax bill in my day job? They never think that. And it's very wise, by the way, in the early years of being a property investor to have a day job because it makes getting mortgages for all this lot a lot easier, because you've got £60,000, happy days! Okay, so how do we manage this? First, and this is going to sound counter intuitive, but I want to just take the top line numbers and share the principles, and I'm not going to go to the fifth decimal place because I just want to keep it easy, I want to share the principles. What I want you to do is take some of your PAYE money and actually pay it into your pension to buy all those shops with. And let me talk you through that. You would set up a SIPP or a SSAS, I help people do it all the time, it's very easy, and it doesn't matter if you haven't got any pension right now. Because three quarters of this country of ours doesn't have a pension, and I find that quite scary. Three out of four of us don't know how much we're going to live on in retirement, can't tell anyone that asks them what their plan is for a pension, and it's just all too difficult, all too hard, and we don't do anything. But imagine how nice it would be to have four shops giving you a £1,000 a month each, £48,000 a year pension. Is that achievable three, four, five years from now? Yes. Might it take you five or ten years? It might. But one thing's for sure, if you don't start now, you're never going to have any. Very simple process to set it up, there's a number of providers that'll do it for free, and it can be done within a matter of six to eight weeks. That's how far away you are from having a pension set up. Now, the maximum that you're allowed to put into a pension every year, and I want you to put in as much as you can afford, but I'll tell you the maximum. The maximum is 40K per annum, £40,000 a year. But in terms of the impact that would have on your take-home salary, they're giving you the tax back. So every £10,000 you put in there is only going to cost you six if you're a 40% tax payer.

So, you're not quite getting double your money, but nearly, and if you're a 45% tax payer, you are very close to getting double your money. So, for every 60 pence, as a high-rate tax payer, which you put over here, you're going to get 40 pence tax back. That's powerful. And you're building for your future, and essentially I want you to ask this question, instead of having £6 of income now, or 6,000 or 60,000, or whatever, now, would I rather have £10, or £100,000, when I retire? And I'm a pensioner by the way, I'm 55, so I can actually draw my SIPP or my SSAS if I want to. Because most people think they can't retire until they're 67, 68, whatever it is, and even then they can't afford to. Well, I can afford to retire now because I've been doing this for 15 years. But this is realistically achievable over that time frame. So, by putting £40,000 a year over here, you're actually going to be getting, effectively, £16,000 of that is tax back. So it's not going to cost your 40, it's going to cost you 24. And there's a reason why I've done it this way, this is not an accident that I've used these numbers as examples. So the next cost to you if you put 40 from there, there, is not 40, it's 24. Which is remarkably similar to that number, isn't it? In fact, it's the same. So what you're doing here is you're giving up PAYE income, which is the most tax inefficient way to earn it, you're putting it into a pension where your 24 suddenly becomes 40, and can you go and buy a shop or something for 40K? Well, I don't want to go too far into it today, but you don't need to because whatever you've got in your SIPP or your SSAS, not you, but the SIPP or the SSAS can borrow an extra 50%. So the 40K here, it can take a mortgage, not you. So your 40K becomes 60. So can you now go and buy, because you put £40,000 a year in there, I said four shops, that wasn't an accident either because you done it for four years, yeah?

So you've put 40K in, but then each year, you're adding a 20K SIPP or SSAS mortgage to it, which is how I'm getting to my £60,000. Can you buy a shop for £60,000, or an office, or a factory, or a warehouse, or a whatever? The answer is yes, you can. These numbers work, how do I know? Because I've got loads of them. So you can use your tax-free income to put into a pension that can then go and start earning money off of shops, or offices, or industrial property, or warehouses, or garages, or I don't know, whatever you want. That then, so this is, you've got four of them, and that's how much they give you every month. And this part of it is completely incredible, blows my mind, and I'm so pleased to be able to share this with you. It's insane, still, even now, 15 years after I started doing it, that £48,000 a year, 0% tax. That's pretty tax efficient. And I'm now at the stage where I've got, well, I've got more than that, but it doesn't matter what I've got, I've got a full-up pension fund. And because I've been doing it for enough years, 15, very quickly your annual income, I've said you're four years in this example, your annual income from the shops, well, you could even stop putting the money in now, even that income on its own, borrow 50% more, that's enough to buy a shop with. So you've now kitted out a pension scheme with enough residual income that you can just reinvest it every year and get another one. So, it's 0% tax plus one free shop.

You're adding one free shop every year, because you put some money in, you've got a big tax credit because you're making pension contributions, that's all tax free because it's inside a pension, and then you've now got it to a critical mass where it just, it's like a snowball going down the hill, you're getting a free shop every year, which means that goes up every year. And you're all stood out there thinking this is insane, what's the catch? That's the catch right there, you didn't know about it. This is the biggest kept secret, this is the... Pensions, if you said to me Paul, in this country of ours, what is the biggest scam? I would say pensions because if you put money into a pension scheme and you don't know all this stuff because you haven't educated yourself, because they don't teach you at school, do they? Come on, I can see you all through the lens, show me your hand if you did a class on commercial property investing, using pensions, in school. No hands didn't think so. The most you can put in your pension scheme is just over a million. So it's currently a million and 40,000. Now let's say you've put a million and 40,000 into your pension scheme, and you retire because this be ridiculous, that's like 10 times the national average. But I want to show you how massive a scam it is, even if you've done that. Because people say to me oh, defined benefit pensions schemes, final salary pensions schemes, they're the best you can have, they're not, in my view. Because you take a million quid, put it into something called an annuity, that's what the pension fund will buy for you when you retire, so effectively, you give them the money, put it into an annuity, and the annuity will pay you about 3%. So that means you’re million pounds, you're going to get a pension of £30,000 a year. That's lunatic! You've got to live 33 years to get your money back. Because when you die, that's gone. You've lost it, nothing for the kids. So if you retire at 67, you've got to live to 100 years old to get your own money back. Now if that's not a scam, please tell me what is. But that's the institutions, that's the system, that's what we're all told to do, it's insane! So you're thinking well, fine Paul, that's fantastic, but I can't afford to take 40 grand of my 60 grand salary and stick it into my pension to buy my shops with, I'll be skint, the kids will be hungry, no holidays in Marbaiya, I'll have to sell the car, or whatever, some version of that. Well, why do you think I've got you invested in buy-to-lets in the first place? So it's costing you a net 24 grand, you're making 24 grand over here, extra. So how much is this actually costing you? Nothing if you know how to structure and put it all together in terms of pieces of the jigsaw. But now you're saying well, Paul, how do I get my 24 grand profit out of there? I'm going to have to pay tax on it. Yes, you are. So what kind of taxes are you going to have to pay on that 24 grand? Well, if you made a profit, I mean, there's a whole level of other sophistication, but this is just the really basic stuff.

This is the really basic stuff, because can you reduce that profit, for instance, by charging your car mileage against it? Yes. How much are you allowed to charge, 45 pence a mile? How many miles a year, 10,000, that's four and a half grand. So you could reduce your taxable profit by claiming £4,500 for motoring. And if, as a property investor, you're driving about looking at properties and considering investment areas, is that a legitimate business mileage, of course it is. Now, please tell me where you can go to the United Kingdom without seeing a house, or a shop, or an office of some kind, ever? So could you be doing research, legitimately, in different areas? And this all needs to be legitimate, of course. What else could you do to reduce the profit? So, I've talked about car mileage, let's write that down. 45 pence per mile, maximum 10,000 miles a year, and that's per person. So that's you and, I don't know, your partner, your misses, your fiance, whoever, boyfriend, girlfriend, don't care, as long as they're part of the business. Board meetings. For years and years and years I was a senior executive in a big company and we used to have board meetings. Not every month. 80% of the managers or the directors, sorry, that were part of my board would live in the UK. The only place we never had a board meeting, the UK. We would go to Singapore or New York, or wherever. Is that a legitimate business expense? Yes. Could you extend and have a few days holiday while you were there, after your board meeting? Yes. Could you be thinking about doing service accommodation in Marbaiya, yes you could? So is there a legitimate reason why you might have a board meeting over there, and tag on a holiday? So I don't want to go into that today, there are loads of ways you could reduce that, but let's say you're making a profit of 24 grand after you've used legitimate strategies to reduce the profit. Well, I don't want you to pay that to yourself as salary because you've already got a salary over here, you'll kick straight into 40% tax, no, don't do that. And the company will have to pay the employer's national insurance. You will have to pay employee's national insurance, you're just going to get taxed to kingdom come. You're going to lose half of your money. So that 24 grand, I specifically want you to pay it to yourself as a dividend. And this is as complicated as I'm going to get in this video today. But I want you to understand, you have to understand, the essential elements of dividend. So a dividend can only be paid from profit. So you'd actually have to declare a profit in the company of 24 grand. And that means that you're going to have to pay corporation tax, so not income tax, yeah, I know, by now your head's spinning. Another tax, oh, what's all this? Corporation tax. Well, corporation tax, this year, is 18%, but next year it's dropping to 17%. So let's say, for this example, 24,000 profit, going to pay 18, next year 17, so it will be 17 by the time you actually do this because this is in four years time, isn't it? So what's 17% of 24? Well, 20% of 24 would be 4,800, so 17% is roughly 4,400. I haven't got a calculator, I'm just doing it in my head, but it's four and a half grand. Now you can pay a dividend. So from your 24, you've got roughly 20 left that you can pay yourself as a dividend, so this money now goes back that way, to you, because you've given up some of that to go in there, yeah? You got that. That's building a pension for the future. You've supplemented it, you've replaced it there, and I've made the numbers the same. I can't make them exactly the same because I've got to take the tax out. So, you've got 24 profit, pay your corporation tax, bar a few hundred pounds, you've got 20K left. So now, back into your personal bank account as a dividend, you're going to pay £20,000. How much tax do you pay on that, personally? Well, you are going to pay the first £2,000 of dividend equals nothing, it's tax free.

Now, I'm keeping it simple, there's one person in this example. But let's say you've got your wife in there and two of your adult children. This £2,000 is per shareholder, per year. So if there's four of you, you could be pulling out £8,000 tax free every single year. You can't make this stuff up. Of that dividend, you are going to pay 7.5%. So 7.5% on 18K. Well, 10% on 18K will be 1,800, 7.5 is three quarters of that, so you're going to be paying about £1,300, so you can give yourself £20,000 of income and your tax is going to be at 7.5%, and again, in my head, I might be 100 quid out, I think it's about £1,300. So your total tax bill is about four and a half there, one and a half there, it's going to be about six on 24. But if you just push that through as a 40% taxpayer, it'll be more than double that. So your tax efficiently using your PAYE money to build your pension to buy shops and stuff, which you're going to save for your old age. You're using your limited company to replace the income that you're putting into your pension, so it's almost free. So I got a question for you. Hopefully, I haven't, looking back on it, it looks a bit complicated now. But that's the easy version. So my second action, my second activity for you is I wanted you to go and check out your payslip, and make sure you understand all the numbers, that's number one.

Number two, I want you to go and find out about SIPPs and SSAS's because you can't do this unless you know what a SIPP or SSAS is and you get it set up.

Number three, and perhaps most importantly, I want you to ask yourself a question, and the question, so your third and most important action, if you want to take an action from me, is why you haven't done this already. And what, specifically, are you going to do about it? But first, I want you to understand why you haven't done it. I know you can do it, I've done it, I train thousands of people every year to do it. I'm going to give you the two reasons that will stop you from doing this.

The two things, in my experience, that you have to have in order to make this happen. Number one, knowledge. As a wise man once said, "Information is not knowledge." All of this stuff is in the public domain. All of it's available on the internet. Well, if the information is all you need, then surely to Christ everybody would have done it. So the information is not knowledge. I need you to equip yourself with knowledge. And if you did that, if you were tax neutral here because you had some buy-to-lets replacing the income that you were putting into your pension, but you built a million pound pension fund by the time you were 55. My pension fund yields an average of 12.5%, which is more than £125,000 a year. So my pension gives me more than £10,000 a month. And if you can gain a pension of £10,000 a month without it costing you anything, and instead of getting it destroyed by putting into an annuity, you've still got the million and £40,000, and the income through the shops that it's throwing off is 125 grand a year, it's 10 grand a month. Think of what difference that's going to make, because when you die and you will, I'm sorry, at some stage, what happens to that pension fund? Goes to your kids, it's not like an annuity. You keep it, your family keeps it, it goes wherever you want it to go. So the biggest question I want you to ask is why you haven't done it. And I know what it's going to be, it's going to be knowledge, so go and get the knowledge, go and invest in yourself to get the knowledge to be able to do this. The second thing you need to do is take some action. So those are your three tasks if you want to take them on.

https://youtu.be/88ZcTsQSYJM

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