Drifting into the 40% tax bracket
Discussion
Hi all,
Just wanting to ask for advice regarding potential pitfalls of being fortunate enough to probably be breaching 50k earnings by the end of the tax year.
To get the simple stuff out the way not married, no kids.
Job 1 is full time- hourly rate, PAYE and some variation in hours per month so never exactly the same monthly wage. Pension is a basic workplace arrangement.
Job 2- 0 hours, hourly rate, PAYE, again there will be variation in hours but I should be earning over the threshold to trigger auto enrollment and contributions into another standard workplace pension.
I'm anticipating by the end of the tax year I will have earned something around £55k in total but will probably have not paid any higher rate tax due to both employers only taxing at 20%. Would it be reasonable to wait for both p.60s to come through, contact HMRC to pay any tax outstanding and then pay the correct amount into my SIPP, speaking with an accountant to claim the additional tax relief back?
Essentially anything I earn which would be taxed at 40% I would pay into my SIPP, and I could make this happen after the tax year has ended?
Many thanks
Just wanting to ask for advice regarding potential pitfalls of being fortunate enough to probably be breaching 50k earnings by the end of the tax year.
To get the simple stuff out the way not married, no kids.
Job 1 is full time- hourly rate, PAYE and some variation in hours per month so never exactly the same monthly wage. Pension is a basic workplace arrangement.
Job 2- 0 hours, hourly rate, PAYE, again there will be variation in hours but I should be earning over the threshold to trigger auto enrollment and contributions into another standard workplace pension.
I'm anticipating by the end of the tax year I will have earned something around £55k in total but will probably have not paid any higher rate tax due to both employers only taxing at 20%. Would it be reasonable to wait for both p.60s to come through, contact HMRC to pay any tax outstanding and then pay the correct amount into my SIPP, speaking with an accountant to claim the additional tax relief back?
Essentially anything I earn which would be taxed at 40% I would pay into my SIPP, and I could make this happen after the tax year has ended?
Many thanks
If you have two PAYE employments, the main employment usually uses up your Personal Tax Allowance. The second employment should then tax you without deducting any allowances. If HMRC and the employer get their act together properly, the rate of tax applied to your second employment should be the correct rate for that level of income.
However, as you state, sometimes the second employer cannot, or does not bother to push for, a correct coding notice for the second job and simply applies basic rate (BR) of 20% tax to the second employment - which may not be correct.
If you feel that applying BR to your second employment salary will result in you paying too little tax under PAYE, you could take matters into your own hand and contact HMRC directly and tell them to apply tax at the higher rate to the second employment.
It's actually quite difficult for HMRC to work out what they need to do to get these situations properly sorted in real time. Often, matters can only be resolved once the tax year has ended and then you can retrospectively contact HMRC to sort out any tax over or under payments.
However, as you state, sometimes the second employer cannot, or does not bother to push for, a correct coding notice for the second job and simply applies basic rate (BR) of 20% tax to the second employment - which may not be correct.
If you feel that applying BR to your second employment salary will result in you paying too little tax under PAYE, you could take matters into your own hand and contact HMRC directly and tell them to apply tax at the higher rate to the second employment.
It's actually quite difficult for HMRC to work out what they need to do to get these situations properly sorted in real time. Often, matters can only be resolved once the tax year has ended and then you can retrospectively contact HMRC to sort out any tax over or under payments.
LeoSayer said:
Does either employer offer salary sacrifice for pension contributions? That's far more tax efficient.
My wife is about to start a new job with a £45k salary, but she will also get £600/month car allowance which will put her £1,929 over the 40% tax bracket. I guess we ought to look into increasing her pension contributions to negate this?LeadFarmer said:
My wife is about to start a new job with a £45k salary, but she will also get £600/month car allowance which will put her £1,929 over the 40% tax bracket. I guess we ought to look into increasing her pension contributions to negate this?
That is one way. Charitable donations might help too.Based on what the figures above, the extra tax she will pay in the year is £385.80 £1,929 @40% less the 20% tax she would have paid anyway.
There will be some extra NI too, of course.
anonymous said:
[redacted]
“Salary sacrifice” doesn’t just mean “paying money into a pension”. It’s a particular way of doing it, only offered by some employers. In essence, you save on employee’s NI and SLC as well. That’s the benefit.
Have a play on salary calculator, comparing two otherwise equal packages but one on “employer” pensions and one on “salary sacrifice”. The SS will always be a bit better.
anonymous said:
[redacted]
It depends how you structure the contributions but let's say you are earning £60k (£5k per month) and decide you want to contribute £8k gross to a pension via SS in this tax year:Scenario 1 contribute £4k per month for 2 months via salary sacrifice:
Gross salary (after £8k SS) £52,000
NI: -£4,935
Income tax: -£8,232
Net salary: £38,833
Scenario 2 via SIPP and tax reclaim
Gross salary: £60,000
NI: -£5,833
Income tax: -£11,432
Net salary: £42,735
Net contribution to SIPP £6,400 (SIPP provider claims £1,600 making £8k total)
20% HRT reclaim by you from HMRC £1,600
Net salary after contribution = £37,935 (£42,735-£4,800+£1,600)
The above is an example of how you are around £900 better off by making adding £8k gross to your pension via SS. It's due to the fact that NI is calculated per pay packet rather than per year like income tax plus the fact that NI is regressive (higher earners pay less NI).
Hopefully my calcs are right.
As above, make the most of salary sacrifice benefits!
My salary is below the threshold, but add in overtime and casual shift working payments I'm well over, but have brought myself down around the threshold, by the following.
Upped my pension contribution to 15%
Partake in a company shares scheme (£1800/year)
Just bought a 5k MTB on c2w scheme (£2500 over 2 years)
Works out at around 11k of sacrifices to bring me under/on which I can make 43% savings.
My salary is below the threshold, but add in overtime and casual shift working payments I'm well over, but have brought myself down around the threshold, by the following.
Upped my pension contribution to 15%
Partake in a company shares scheme (£1800/year)
Just bought a 5k MTB on c2w scheme (£2500 over 2 years)
Works out at around 11k of sacrifices to bring me under/on which I can make 43% savings.
Eric Mc said:
If you have two PAYE employments, the main employment usually uses up your Personal Tax Allowance. The second employment should then tax you without deducting any allowances. If HMRC and the employer get their act together properly, the rate of tax applied to your second employment should be the correct rate for that level of income.
However, as you state, sometimes the second employer cannot, or does not bother to push for, a correct coding notice for the second job and simply applies basic rate (BR) of 20% tax to the second employment - which may not be correct.
If you feel that applying BR to your second employment salary will result in you paying too little tax under PAYE, you could take matters into your own hand and contact HMRC directly and tell them to apply tax at the higher rate to the second employment.
It's actually quite difficult for HMRC to work out what they need to do to get these situations properly sorted in real time. Often, matters can only be resolved once the tax year has ended and then you can retrospectively contact HMRC to sort out any tax over or under payments.
Thanks very much Eric, this is exactly what I can see happening and until February/March time even I wont really know how far into the bracket I've strayed. However, as you state, sometimes the second employer cannot, or does not bother to push for, a correct coding notice for the second job and simply applies basic rate (BR) of 20% tax to the second employment - which may not be correct.
If you feel that applying BR to your second employment salary will result in you paying too little tax under PAYE, you could take matters into your own hand and contact HMRC directly and tell them to apply tax at the higher rate to the second employment.
It's actually quite difficult for HMRC to work out what they need to do to get these situations properly sorted in real time. Often, matters can only be resolved once the tax year has ended and then you can retrospectively contact HMRC to sort out any tax over or under payments.
Unfortunately I dont think either offer salary sacrifice, I'm guessing my best shot is to work out roughly where I am in march time, make an appropriate contribution to my SIPP e.g if 55k earned, pay 3k into SIPP before the tax year ends, then look at claiming the additional back once the tax year has ended and I've squared with HMRC.
Zigster said:
You have to make the pension contribution in that tax year for it to count against your taxable income for that year. “Carry back” was abolished in 2011 when “pensions freedoms” were introduced.
Much obliged, so if I've got this right pay a sum close to earnings above 50k after tax within the tax year, then claim the additional relief back after the year ends as mentioned above? anonymous said:
[redacted]
It depends on whether your employer offers SS and whether they offer such flexibility with contributions.Other than that, the way NI is calculated which leads to some strange outcomes. For example, if you get paid (say) £50k in a year then you will be more NI if you take this over 12 monthly pay packets than if it was one.
ar-em-en said:
Hi all,
Just wanting to ask for advice regarding potential pitfalls of being fortunate enough to probably be breaching 50k earnings by the end of the tax year.
To get the simple stuff out the way not married, no kids.
Job 1 is full time- hourly rate, PAYE and some variation in hours per month so never exactly the same monthly wage. Pension is a basic workplace arrangement.
Job 2- 0 hours, hourly rate, PAYE, again there will be variation in hours but I should be earning over the threshold to trigger auto enrollment and contributions into another standard workplace pension.
I'm anticipating by the end of the tax year I will have earned something around £55k in total but will probably have not paid any higher rate tax due to both employers only taxing at 20%. Would it be reasonable to wait for both p.60s to come through, contact HMRC to pay any tax outstanding and then pay the correct amount into my SIPP, speaking with an accountant to claim the additional tax relief back?
Essentially anything I earn which would be taxed at 40% I would pay into my SIPP, and I could make this happen after the tax year has ended?
Many thanks
I thought you had to make the pension contribution in the tax year, but there may be some ability to back date it. Just wanting to ask for advice regarding potential pitfalls of being fortunate enough to probably be breaching 50k earnings by the end of the tax year.
To get the simple stuff out the way not married, no kids.
Job 1 is full time- hourly rate, PAYE and some variation in hours per month so never exactly the same monthly wage. Pension is a basic workplace arrangement.
Job 2- 0 hours, hourly rate, PAYE, again there will be variation in hours but I should be earning over the threshold to trigger auto enrollment and contributions into another standard workplace pension.
I'm anticipating by the end of the tax year I will have earned something around £55k in total but will probably have not paid any higher rate tax due to both employers only taxing at 20%. Would it be reasonable to wait for both p.60s to come through, contact HMRC to pay any tax outstanding and then pay the correct amount into my SIPP, speaking with an accountant to claim the additional tax relief back?
Essentially anything I earn which would be taxed at 40% I would pay into my SIPP, and I could make this happen after the tax year has ended?
Many thanks
Googling 'pension carry back' suggests not, but 'carry forward' may be a thing.
I would personally try to keep a little ahead of the game, tot up your earnings through the year and make a contribution in March. Tax is way simpler if you avoid blurring one year into the the next.
The HL website is a good place to start for info, even if they are no longer the cheapest provider.
If possible, you want to look at getting some of the pension 'salary sacrifice' then it can be paid out of money you're not paying NI on.
Personally I would advocate not paying an accountant for anything you can do yourself, they are very busy at the end of tax year and will take a fair slice of the tax you save.
All just my amateur opinion, hope it's helpful as a starter for doing your own research!
The rules do change from time to time!
You might consider putting the extra into a standalone SIPP, which you have control of.
Personally I've avoided anything 'workplace' or 'company', transferring stuff into a SIPP. I have visibility and control. That's not advice.
Eric Mc said:
That is one way. Charitable donations might help too.
Based on what the figures above, the extra tax she will pay in the year is £385.80 £1,929 @40% less the 20% tax she would have paid anyway.
There will be some extra NI too, of course.
Happy to be corrected but I'm not sure why there would be any extra NI?Based on what the figures above, the extra tax she will pay in the year is £385.80 £1,929 @40% less the 20% tax she would have paid anyway.
There will be some extra NI too, of course.
AIUI both jobs will carry their own NI allowances. If OP exceeds the NI threshold on the 2nd job then it will get deducted via PAYE (at source).
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