Salary sacrifice back into 20% tax worth it?
Discussion
Hi,
I am a 40% tax payer as a PAYE. I have taken some salary sacrifice (e.g. cycle to work) which now has me just over the threshold of 40%. It only would take a reduction of around £15 extra per month to reduce my salary before tax into the 20% banding, which I understand could be done by a minor increase to my employee pension contribution.
However I am confused by the additional pension tax relief I am entitled to as a 40% tax payer, and how this additional tax relief would be applied.
In summary, am I best staying just over the threshold as a 40% tax payer (on the negligible amount which is taxable at this rate) for the pension tax relief or should I drop into the 20% band by the minor increase in pre-tax pension contribution via salary sacrifice?
Thanks!
I am a 40% tax payer as a PAYE. I have taken some salary sacrifice (e.g. cycle to work) which now has me just over the threshold of 40%. It only would take a reduction of around £15 extra per month to reduce my salary before tax into the 20% banding, which I understand could be done by a minor increase to my employee pension contribution.
However I am confused by the additional pension tax relief I am entitled to as a 40% tax payer, and how this additional tax relief would be applied.
In summary, am I best staying just over the threshold as a 40% tax payer (on the negligible amount which is taxable at this rate) for the pension tax relief or should I drop into the 20% band by the minor increase in pre-tax pension contribution via salary sacrifice?
Thanks!
If you pay £1 over the higher rate tax threshold then you will only pay 40% on that £1.
If you then pay £2 into your pension you will save 40% on the first £1 and basic rate on the second £1.
ie there is no step change where being a higher rate tax payer has a big impact on your tax relief. It’s all graduated.
If you then pay £2 into your pension you will save 40% on the first £1 and basic rate on the second £1.
ie there is no step change where being a higher rate tax payer has a big impact on your tax relief. It’s all graduated.
If you have significant dividends it is definitely worth doing.
I stepped back into full time from contracting 4 years ago and from December to March my pension contribution was a little over 40% of gross salary to ensure I was in the basic rate income tax band, it saved tax on a few 10ks of dividends paid in the year. Paying 40% income tax on even £1 would have hurt a lot.
I stepped back into full time from contracting 4 years ago and from December to March my pension contribution was a little over 40% of gross salary to ensure I was in the basic rate income tax band, it saved tax on a few 10ks of dividends paid in the year. Paying 40% income tax on even £1 would have hurt a lot.
Thanks. I haven’t gone beyond the dividend tax free allowance of 2k because of fear it being hammered at the higher rate tax (circa 33% I recall). Is the dividend tax based on total income or salary income?
Ie. if you earn over 50k and 40% tax payer than it’s the higher dividend tax rate at circa 33%
Or is it: if you earn 49k so just still within 20% tax you only pay the lower dividend tax circa 8% up to 50k in dividends which is then 33% afterward?
Above are simplistic as appreciate salary sacrifice and pensions etc affect the taxable salary sums. Also typing from phone so apologies for poor formatting.
Ie. if you earn over 50k and 40% tax payer than it’s the higher dividend tax rate at circa 33%
Or is it: if you earn 49k so just still within 20% tax you only pay the lower dividend tax circa 8% up to 50k in dividends which is then 33% afterward?
Above are simplistic as appreciate salary sacrifice and pensions etc affect the taxable salary sums. Also typing from phone so apologies for poor formatting.
If you're only just over the limit it won't make much difference at the moment but it might be worth considering for when you get future pay increases.
The question is, does your company operate a salary sacrifice pensions scheme, and if so are you happy with a £50k salary and the rest in your pension pot?
It's worth noting that once you pay 40% tax your national insurance contributions go down.
After the personal allowance £12,570 22/23 earnings are taxed at;
20% tax and 13.25% national insurance = 33.25%
After £50,271 (£12,570 + threshold £37,701) earnings are taxed at;
40% tax and 3.25% national insurance = 43.25%
Earnings over £100k you start to lose your personal allowance and over £150k you are on 45% tax.
The question is, does your company operate a salary sacrifice pensions scheme, and if so are you happy with a £50k salary and the rest in your pension pot?
It's worth noting that once you pay 40% tax your national insurance contributions go down.
After the personal allowance £12,570 22/23 earnings are taxed at;
20% tax and 13.25% national insurance = 33.25%
After £50,271 (£12,570 + threshold £37,701) earnings are taxed at;
40% tax and 3.25% national insurance = 43.25%
Earnings over £100k you start to lose your personal allowance and over £150k you are on 45% tax.
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