Today's Pension Query

[750turbo]

A quick question before I go and find my IFA...

I currently am a basic (Scottish) Rate Taxpayer, but my Co Car effectively takes me just into the 40% band. I currently only pay the basic into my pension (I was lucky in a previous job, they had a fabulous plan). If I wanted to pay more in myself, would I get the 40% allowance, or the lower rate?

TIA,

[sniff diesel]

Would the extra contributions be as salary sacrifice? If that’s the case then yes, that would have the net effect of lowering your tax threshold

[LordGrover]

My AVC keeps me below the 40% threshold.

[B9]

If you earn £41,500 but your company car BIK works out at say, £5k - this puts you over the Scottish higher rate tax of £43,663 as your taxable income will be £46,500.

Therefore, if you contributed £3k of your salary into a pension (either by salary sacrificing or adding manually into your SIPP) you'll either bring your taxable income back down to below the higher rate, or attract 41% relief from HMRC when you complete your self assessment.

If you can salary sacrifice, do that - it'll also mean you don't pay NI on whatever you contribute

For avoidance of doubt I'm assuming you're an 'intermediate' tax payer (21% between ~£25k and ~£43k) and not 'basic' (20% between ~£15k and ~£25k)

Edited by B9 on Friday 28th October 11:50

[anonymous-user]

To hijack this thread slightly, lets assume you are a 40% tax payer and you contribute to your pension, but the amount you contribute means you are still in the 40% tax band.

The 40% tax band is £50,271, lets assume you earnt £60K and contributed 10% to you pension meaning you still earned £54K and was still in the 40% tax band.

If you paid in 20% of your salary meaning you then earned £48K, would this mean you only got 20% relief on your pension contributions?

Basically, what is the optimal amount you should be paying into your pension to get the 40% relief, should you pay enough so you are still earning £50,272 or does it not matter if the starting salary before sacrifice is over £50,271?

[750turbo]

B9 said:

If you earn £41,500 but your company car BIK works out at say, £5k - this puts you over the Scottish higher rate tax of £43,663 as your taxable income will be £46,500.

Therefore, if you contributed £3k of your salary into a pension (either by salary sacrificing or adding manually into your SIPP) you'll either bring your taxable income back down to below the higher rate, or attract 41% relief from HMRC when you complete your self assessment.

If you can salary sacrifice, do that - it'll also mean you don't pay NI on whatever you contribute

For avoidance of doubt I'm assuming you're an 'intermediate' tax payer (21% between ~£25k and ~£43k) and not 'basic' (20% between ~£15k and ~£25k)

Edited by B9 on Friday 28th October 11:50

Spot on!

Thanks for the comments all.

[Mogul]

Joey Deacon said:

Basically, what is the optimal amount you should be paying into your pension to get the 40% relief

The clue is in the word ‘relief’.

HMRC only want it give you ‘relief’ in respect of the tax that you have *actually paid* and the way they do this is to *extend* *your* basic rate tax band by the ‘grossed-up’ contribution that you have made.

E.g., if you earned £50,271 that last £1 would ordinarily be taxed at 40% i.e., 40p of tax to pay on that last £1

However, if you put 80p into your personal pension, the pension scheme would credit you with an extra 20p (within 6-8 weeks) and HMRC would (on request!) *extend your basic rate tax band* by £1 so that this last £1 of your income would only be taxable at 20% (and not at 40%).

However, given that they would have already taxed you at 40% via PAYE, you are now due a tax refund of 20p.

That’s how it works.

The automatic bit is the credit that is added directly to your pension by the scheme administrator.

For those who pay ‘some’ 40% tax, the way that you get the extra 20% of ‘relief’ is via the tax refund that you have to claim from HMRC.

Note that this part comes directly back to you (usually as an adjustment to your tax code so that you pay less tax in a future period) and it does not get added to your pension scheme…

e.g. your ‘Pension Input’ would be £1 (even though it only cost you 80p in cash terms) and you would have an extra 20p in your pocket (you would get this in the form of a lower PAYE tax charge in a subsequent period. I.e., £1 in your pension has cost you 60p (80p paid in less 20p due back to you) and that is how you need to think of the 40% tax relief.

If you then put another 80p into your pension, the scheme would of course add the 20p credit but as you only paid 20% tax on that income, you have paid no 40% tax and therefore, no additional ‘relief’ is due to you because that £1 was only taxed at 20%.

Simples!

[AndyAudi]

If you’re crossing from 21% into the 41% band >£43,600 (+ still paying full national insurance until you get to £50k) it begins to get worth looking at some of your other existing out goings to see if they can help reduce liability.

Are you a member of any professional organisation
Do you make charitable contributions.
Do you pay for kids subscriptions to likes of Scouts & Guides
Do you have a uniform

All above are allowable & can get your tax code adjusted to let you keep more of your money (rather than giving it to Nicola to spend on vanity projects)