Pension contributions & higher rate tax

[BRISTOL86]

Hi Folks

I think I know the answer to this, but am I right in thinking that once you start to become a higher rate tax payer, if you can afford the reduction in disposable income, it’s sensible to increase pension contribution to the amount that brings you down to paying no 40% tax?

That’s how it works, right? I currently pay 40% tax on a small part of my salary, but increasing my contributions will reduce that amount that’s subject to 40%, yes? So makes sense to set the contribution to the point that I pay nil higher rate tax?

Thanks and apologies if stupid question!!

[xeny]

Yes.

not much more to say.

[JulianPH]

You are correct, right and everything else.

If you can (afford to), then send this money into your pension to defer the higher rate of tax today until you are retired and only paying basic rate.

[BRISTOL86]

Thanks both. Thought it really was that simple but just checking

[harveys]

Sorry can I just ask. If you start work at the beginning of April on say £50k, are you taxed 40% that month so it averages out OR are taxed at standard rate until you go over £45k after which you are charged 40%?

Thank you.

[JulianPH]

harveys said:

Sorry can I just ask. If you start work at the beginning of April on say £50k, are you taxed 40% that month so it averages out OR are taxed at standard rate until you go over £45k after which you are charged 40%?

Thank you.

Your tax code should tell you this (if you are employed). If you are self-employed your accountant should manage this.

I believe you will be taxed at the higher rate all year (on higher rate earnings).

Eric should be about soon and will give you the definitive answer.

[SS9]

As I understand it, tax is assessed pro-rata e.g. your position is assessed each month and tax calculated accordingly. It isn't a case of jumping up brackets once you hit the threshold during the year, it's assessed month by month and trended out to calculate your tax position. If you're a higher rate tax payer and earn an equal amount each month, your tax deductions will be equal each month. I think this is how people end up with tax refunds at the end of a year - if your salary was high for the first 9 months then suddenly dropped to zero for the remainder of the year, you may have paid higher rate taxes but ended the year below the threshold and therefore be owed a refund.

I'm sure someone else will be along to confirm the above, it's been a while since I've studied this!

[T6 vanman]

My experience as PAYE

April - with massive overtime - Taxed pro rate at 40% on earnings over £3750
May - with again overtime - Taxed pro rate at 40% on earnings over £3750
June - with no overtime - Paid surprisingly little tax and total tax taken was correct as to all 3 months, all very clever by payroll girls HTHs

[harveys]

Thank you for the replies so far...

[h0bbsy]

For some reason it took a me a good five years to figure this out. And then maybe another few years to realise I could go back a few years of contribs (which I never did)

What I would add that hasn’t been mentioned so far is if you can do it via salary sacrifice then the benefit could be greater as you won’t pay National Insurance on the amount either. Whereas if you do a manual contribution eg to a SIPP you’ll only get the income tax benefit.

[ringram]

Correct. Salary sacrifice is always best. The employer will also make out so will be able to share some more savings with you. We gave our staff another 10% pension top up if paid from Salary sacrifice.

[otherman]

Correct, if your employer uses salary sacrifice you save the tax and the NI.