How do I carry on paying the lower rate of tax ?
Discussion
Hello. I am starting a new PAYE job earning £60k on the 1st of February.
Up to now, my income came from dividends from my business - any profits over the higher tax threshold were paid by my business as employer's pension contributions.
That allowed me to only pay 20% tax (or whatever equivalent this is for dividends). I will stop taking any income from my business on 1st Feb.
Question : can I now pay say £20,000 of my new income straight into the workplace pension scheme of my new employer and therefore stay just within threshold ?
Or will my total income still be £60k and taxed as such ? This is particularly crucial as I am also getting a cy car which would be BIK taxed at 40% rather than 20%.
Thanks and apologies for the candid nature of the question.
Up to now, my income came from dividends from my business - any profits over the higher tax threshold were paid by my business as employer's pension contributions.
That allowed me to only pay 20% tax (or whatever equivalent this is for dividends). I will stop taking any income from my business on 1st Feb.
Question : can I now pay say £20,000 of my new income straight into the workplace pension scheme of my new employer and therefore stay just within threshold ?
Or will my total income still be £60k and taxed as such ? This is particularly crucial as I am also getting a cy car which would be BIK taxed at 40% rather than 20%.
Thanks and apologies for the candid nature of the question.
You need to ask your employer if they will facilitate a £20,000 salary sacrifice arrangement.
However, if you are going to throw £20,000 pa into a pension arrangement you would probably benefit from some independent financial advice for which one rather than assuming the workplace pension is the best home for it.
However, if you are going to throw £20,000 pa into a pension arrangement you would probably benefit from some independent financial advice for which one rather than assuming the workplace pension is the best home for it.
I'm assuming like most companies they will match contributions up to x% thereafter you can pay in more (or maybe not) or you could pay in the difference to a private pension/the one you've been paying in to date and claim it back in Self assessment.
Can I ask what is the reason to forgoe £20k in gross salary now every year + increasing. Is it purely to save £4K in tax? If so your missing out on opportunity cost where the return could beat that.
Plus who knows what pension changes may or may not happen - it looks like lots of your eggs are in one basket a diversified investment strategy mitigates all sorts of risks.
Let's say between now and your expected 57yo potential drawing of private pension the govt change the rules so it's now 75yo.... Given life expectancy of 80yo would you get out what you paid in?
Can I ask what is the reason to forgoe £20k in gross salary now every year + increasing. Is it purely to save £4K in tax? If so your missing out on opportunity cost where the return could beat that.
Plus who knows what pension changes may or may not happen - it looks like lots of your eggs are in one basket a diversified investment strategy mitigates all sorts of risks.
Let's say between now and your expected 57yo potential drawing of private pension the govt change the rules so it's now 75yo.... Given life expectancy of 80yo would you get out what you paid in?
Welshbeef said:
I'm assuming like most companies they will match contributions up to x% thereafter you can pay in more (or maybe not) or you could pay in the difference to a private pension/the one you've been paying in to date and claim it back in Self assessment.
Can I ask what is the reason to forgoe £20k in gross salary now every year + increasing. Is it purely to save £4K in tax? If so your missing out on opportunity cost where the return could beat that.
Plus who knows what pension changes may or may not happen - it looks like lots of your eggs are in one basket a diversified investment strategy mitigates all sorts of risks.
Let's say between now and your expected 57yo potential drawing of private pension the govt change the rules so it's now 75yo.... Given life expectancy of 80yo would you get out what you paid in?
1) life expectancy is probably more like 85 than 80Can I ask what is the reason to forgoe £20k in gross salary now every year + increasing. Is it purely to save £4K in tax? If so your missing out on opportunity cost where the return could beat that.
Plus who knows what pension changes may or may not happen - it looks like lots of your eggs are in one basket a diversified investment strategy mitigates all sorts of risks.
Let's say between now and your expected 57yo potential drawing of private pension the govt change the rules so it's now 75yo.... Given life expectancy of 80yo would you get out what you paid in?
2) at age 75, that expectation of life would be >> 85
Thanks for all the comments and thx Welsh for your initial post.
I am only looking at things from a pure fiscal pov at this stage but I agree this particular pension provider might not be the best around.
As for retirement, I am aiming at 55 (I am 46) if the recent changes are not overturned. I understand that, unless the rules change, I can start drawing at the nominal rate of tax then (in addition to the 25% tax free lump sum) at 55.
Our retirement strategy has been more atomised than that : one third pension schemes (previous arrangements + this one), property (btls) and maxing out 2 people's ISA for a number of years. The 3 thirds obviously don't have equal sizes now !!
What opportunity cost do you think of WB ? I'd have thought the 20% head start is pretty good despite yearly admin fees ?
My new employer is quite happy to let me dedicate up to £40k/year.
I am only looking at things from a pure fiscal pov at this stage but I agree this particular pension provider might not be the best around.
As for retirement, I am aiming at 55 (I am 46) if the recent changes are not overturned. I understand that, unless the rules change, I can start drawing at the nominal rate of tax then (in addition to the 25% tax free lump sum) at 55.
Our retirement strategy has been more atomised than that : one third pension schemes (previous arrangements + this one), property (btls) and maxing out 2 people's ISA for a number of years. The 3 thirds obviously don't have equal sizes now !!
What opportunity cost do you think of WB ? I'd have thought the 20% head start is pretty good despite yearly admin fees ?
My new employer is quite happy to let me dedicate up to £40k/year.
Edited by nickfrog on Monday 25th January 09:10
It's the fact the money is tied up in a package whose benefit could change - clearly it would only deteriorate.
But as you've listed other areas of diversity it's a sensible option.
One thing though (which I cannot find currently) is there was/is a % limit which you can invest depending on your age - for instance my mother was able to invest only 55% of her salary at her age group and I think it starts at 15-18% for youngsters.
Might have changed now or it could be the lower of the £40k Max per year or x% age related. This may or may not impact you.
Sidicks no doubt has the knowledge to correct me here.
But as you've listed other areas of diversity it's a sensible option.
One thing though (which I cannot find currently) is there was/is a % limit which you can invest depending on your age - for instance my mother was able to invest only 55% of her salary at her age group and I think it starts at 15-18% for youngsters.
Might have changed now or it could be the lower of the £40k Max per year or x% age related. This may or may not impact you.
Sidicks no doubt has the knowledge to correct me here.
Welshbeef said:
Given the very small circles of Actuary's you'll likely know a good friend of mine.
It used to be a small circle, but the profession has expanded a lot and across Life, Pensions, General, Investments & Other you are probably looking at 5,000 actuaries!Depending on the space they work in (and their profile) I might know them, but it's by no means certain.
nickfrog said:
Cool - we'll see how it pans out in the coming years, nice problem to have I guess.
PS we have about 6 actuaries at work : I am not even sure they all know each other. It's not that small a circle, is it ?
Last time I spoke to him about this (some years ago mind) he said total numbers UK numbered sub 200 IIRC. So it's highly likely he knows/is aware of sidicks PS we have about 6 actuaries at work : I am not even sure they all know each other. It's not that small a circle, is it ?
Of course it might have changed now.
Also I know one in Lloyds
I recall one rugby session we had after beers he alluded to the fact he's been given 21days work at £XK at that time he earned more in 21 days than I did in 227.
Welshbeef said:
Last time I spoke to him about this (some years ago mind) he said total numbers UK numbered sub 200 IIRC. So it's highly likely he knows/is aware of sidicks
Of course it might have changed now.
Also I know one in Lloyds
Maybe there were less than 200 actuaries in his particular niche at the time?Of course it might have changed now.
Also I know one in Lloyds
Certainly when I joined the profession over 20 years ago I think it was circa 3,000 qualified actuaries worldwide, which seemed incredibly small compared to the size of the accountancy profession, for example.
According to the Institute and Faculty of Actuaries, at the end of 2014 there were 12,000 qualified actuaries worldwide. Around 50% in the UK, so not that uncommon any more.
Welshbeef said:
I recall one rugby session we had after beers he alluded to the fact he's been given 21days work at £XK at that time he earned more in 21 days than I did in 227.
Are you sure he's an actuary? Bragging about remuneration doesn't sound like the style of most actuaries!Gassing Station | Finance | Top of Page | What's New | My Stuff