Why I reuse my poppy

The Royal British Legion is a charity that provides assistance to the British Armed Forces community of serving personnel, veterans, dependents and families.  Their worthy Poppy Appeal is focused on Remembrance Day itself (11 November) but actually runs all year round.

It’s a familiar part of the British cultural landscape as many people support the charity by making a donation and wearing their poppy with pride.

Poppies ready to be worn.

There are some notable opt-outs including Jon Snow, the presenter of Channel 4 news.  Responding to criticism concerning his refusal to wear a poppy on air while presenting the news, Snow said:

[British troops] died that we might be free to wear a poppy whenever we wish.  I wish to wear mine on Remembrance Sunday.

When you wish to wear yours is your business. Compelling people to wear poppies because you think they ought to is precisely the poppy fascism, or intolerance, that I have complained of in the past.

Fair enough, I suppose.

I only wear mine when I remember to take it out of the drawer and put it on.  I’ve had the same poppy for around four years now and I hope it will give me a few years of good service yet.

‘What’s all this?’ I hear you splutter, ‘Recycling your poppy? What about our brave boys blah blah blah…’

Well yes, actually.  And I made sure that I put the absolute minimum in the collection box too when I acquired it.

The reason?  Efficiency.

First of all, the poppy itself.  It costs, at most, pennies to produce.  They’re made in a single room in Richmond-Upon-Thames in London by a small but dedicated team.  The thing is, they made 38 million of them in 2008.  If everyone who buys one each year simply recycled theirs and replaced them say only every five years and assuming they cost just 2p to manufacture and distribute that would net the charity an extra 2p x 38m x 4/5 = £608,000 each year.

Secondly, reuse brings the added benefit of reducing landfill waste just a tiny little bit.  The cumulative effect if everyone did it would certainly add up and every little helps.

Thirdly, Gift Aid.  For anyone who pays UK tax, this has to be a complete no-brainer.

1. Donations are assumed to have had basic rate tax deducted from them.  By using Gift Aid, the charity is able to reclaim that tax for itself.  A £100 donation becomes £125 for the good cause.
2. Better still, higher or additional rate tax payers can reclaim the rest of the tax paid on the donation.  That £100 donation is worth £125 to the charity, but a 40% tax payer can claim back £125 x (40% – 20%) = £25 and a 50% tax payer claims back £125 x (50% – 20%) = £37.50.  Poor unfortunates who are being tapped by the Exchequer for an effective 60% rate can in fact reduce their tax bills by £50, meaning that the smart giver can give even more.  Cheers George!
3. Payments can even be effectively backdated to offset against tax paid in the previous year if the giver runs out of taxed income to use.

Win-win-win.  According to unbiased.co.uk nearly £1 billion was gifted to the tax man in 2007/8 because of inefficient giving.

A small but appreciable chunk of my charitable giving goes to the British Legion each year via Virgin Money Giving which operates on a not-for-profit basis in order to pass even more moolah on to the charity in question.

All of which means I can wear my recycled poppy with pride.

Death and Taxes

Reading Mr Money Mustache’s take on the low tax burden for those living the frugal retired lifestyle has prompted me to review my own level of tax efficiency.

While not yet retired myself, I’m fortunate enough to be compensated for going to work with a sizable income.  Only last week I received my P60 providing a summary for UK tax payers of the Income Tax and ‘National Insurance’ (i.e. income tax) paid on employment earnings in the previous tax year.

For the first time in my career, taxable earnings exceeded £100,000.  Obviously, it would be churlish of me to complain about that, but I mentally kicked myself at allowing it to happen.

Why?

Taxable earnings are not the same as earnings.

There are steps that can be taken (legally I hasten to add) to keep taxable earnings to a minimum.  The trouble is, I seem to fall into a Bermuda Triangle of information on how to achieve this.  At the higher end of the earnings spectrum, accountants and other tax planners are frequently employed to assist.  At the lower end, there are many forums to be found at the click of a mouse advising on the best way to ensure all benefits, tax-credits and allowances are claimed.

I think my financial affairs are straight-forward enough to be able to manage this myself (Insourcing my own financial advice) and save myself a few hundred quid in fees, I have no interest in pursuing the more aggressive tax-planning that can lead to an uncomfortable chat with the chaps at HMRC, and I’d rather learn how to do it myself.

This chart shows the UK tax rate inclusive of both Income Tax and National Insurance but ignores the effect of tax credits and other benefits that would be of more interest to those at the lower end of the earnings scale.

I now find myself perched on top of that 62% tall column in the middle of the chart.  Am I really such a fat cat that I deserve to be taxed at a higher marginal rate than those earning   £150,000 or higher?

This bizarre quirk is the effect of a rather idiotic change to the tax code which withdraws the personal tax allowance from those earning more than £100k pa.  For every £2 earned above that amount the personal allowance is reduced by £1, dwindling to nothing at £116,210.

So what can be done?

Very little, as it happens.  If you are paid via PAYE (Pay [tax] As You Earn, where taxes are deducted at source) there are in fact precious few options available.  Despite popular misconceptions about fat cats failing to pay their dues, it’s nigh on impossible to avoid tax as an employee.

Here are some of the precious few methods I have found.  If anyone knows more, please comment below.

Pension contributions

This is probably the best one for a higher or additional rate tax payer.  Contributions can be made to a pension plan out of pre tax income.  This is what I should have done more of to get me below that crucial £100k limit.

For every £100 I put into my pension, I needed only to give up £38 of post-tax income at the highest marginal rate of 62%.  Although I can’t touch the money again until I’m 55 (and assuming there are no future legislative changes delaying the option still further) I get a day one investment return of 163%.  Not bad!  Admittedly, once I draw my pension it counts at taxable income, but I’m likely to be paying tax at a much lower rate than now.  What’s more, I can take out 25% of my fund tax-free once I retire.

So my notional £38 plus its tax rebate will grow over time, assuming a 2% real (post-inflation) investment return for the next 23 years (taking me to 55) to just under £158.  I’ll then be able to draw down £40 tax free and still have £118 to either draw down over time or convert to an annuity i.e. a stream of payments for the rest of my life taxed at 20%.

Quite a good deal.

Pension legislation can move quite quickly so I’ll need to keep a close eye on this strategy but for now it remains the best option.

Share Incentive Plans

For those working for a listed employer, a Share Incentive Plan can provide a tax efficient route to owning shares in their employer.  Up to £125 per month of pre-tax, pre-NI income can go towards purchasing shares in the employer’s scheme.  Here’s what HMRC says.

There are some conditions on the length of time the shares need to be held to receive the tax breaks in full but generally speaking for a 40% (or 50%) rate income tax payer, £125 worth of shares can be acquired for just £72.50 (or £60.00) each month.

Save As You Earn

A related strategy is the Sharesave plan.  This is a savings contract where employees put aside between £5 and £250 per month are offered the option of purchasing shares at a specified (usually discounted price) after a fixed savings period of three or five years.

Here’s the guidance from HMRC again.

Ermine at the Simple Living in Suffolk blog did a good piece on the benefits and pitfalls of these types of share plans.

Charitable giving

I’ve been in the position of being able to step up my charitable giving over the last few years as my income has grown.  The relevance to this post is that it’s all tax deductible thanks to the recent U-turn.

I might come back to this topic when I do my tax return later in the year.

Welcome to The Edge of Cultivation

This blog is about my journey into the uncharted lands beyond the edge of cultivation.

I’ll be exploring ways to optimise my life in as many areas as possible.   I’ll probably focus on financial issues to start with but, hey, I might throw in some interesting ideas on healthy eating and exercise, property, work, science and technology and a whole bunch of other stuff I haven’t even got round to thinking about yet.

The mainstream media is full of handy hints, tips, tricks and suggestions for living a happier and more fulfilled life.  The trouble is most of them either don’t apply to my specific circumstances or simply don’t work.  Conventional wisdom needs to be placed under the microscope of the scientific method and either explained or discarded.

I’ll be leaving breadcrumbs for those who wish to follow me along the way.