Pension contributions between married couple

[simoid]

Have searched but can’t choose specific enough terms to find an answer my question. To keep it short:

Spouse A earns enough to pay the higher rate income tax.
Spouse B earns enough to pay basic rate, but not higher rate.

What’s the catch(es) with spouse A raising their pension contributions so that they don’t pay any higher rate tax, and spouse B doesn’t pay any pension contributions whatsoever?

I assume/expect possible future divorce would be more of a pain with this.

TIA

[Kirkmoly]

No catch per se; A gets relief at 42% whereas B gets relief at 32% (including NIC).

However if B is an employee and fails to make pension contributions that would have been matched by their employer, the numbers would not work your favour.

[Caddyshack]

Also, one person may end up with a big pension and pay lots of income tax in retirement and the other ends up with hardly any pension and pays zero tax in retirement where it may be better for them to both have a medium pension in retirement and use all tax allowances.

[simoid]

Thanks guys, hadn’t thought about either of those.

Pub discussion came up earlier as Scottish higher tax rate has nipped up to 42%, and our higher tax rate threshold is lower than the step in NI, so there’s actually a couple of £k earnings where Scots will pay 54% marginal tax rate. (Do £1k of overtime, take £460 home)

[irc]

Discussed on the Scottish Indy thread in NPand E.

Earnings between £43662 and £50k taxed at penal 54% rate. Add superann and my take home is about a third

I am dealing with it by making contributions to private pension. As per


https://www.brewin.co.uk/insights/how-pensions-low...

[Mogul]

Can’t see a potential/prospective divorce having an impact here as both spouses would need to put their pensions on the table with a view to reaching an agreement.

If you are thinking that Spouse B would need to forego their pension contribution to maintain the family budget (net cash in after tax and pension contribuions) then that’s one thing but if there is another source of funds (e.g. savings and/or an ISA) then this could tapped in to to replace Spouse B’s lost net income and the available tax relief could be secured (if that helps).

E.g. if Spouse B ‘cannot afford’ to continue contributing to their pension based on their (payroll) net income, they might be able to transfer £800 from their ISA into their SIPP and secure the available basic rate relief of £200 (it’s ‘free money’, grab it while you can etc.)

[WayOutWest]

irc said:

Discussed on the Scottish Indy thread in NPand E.

Earnings between £43662 and £50k taxed at penal 54% rate. Add superann and my take home is about a third

I am dealing with it by making contributions to private pension. As per


https://www.brewin.co.uk/insights/how-pensions-low...

Won't the marginal tax rate from £100 to £125k be about 62% now in Scotland, in fact 64% if you are a PAYE employee (e.g including employee NICs).
Not far off two thirds of your money going to Wee Jimmy Krankie!

[Carbon Sasquatch]

Caddyshack said:

Also, one person may end up with a big pension and pay lots of income tax in retirement and the other ends up with hardly any pension and pays zero tax in retirement where it may be better for them to both have a medium pension in retirement and use all tax allowances.

I completely agree with this - the lower earner wants to have at least enough in their pot to be able to maximise their tax free allowance every year.

There's no point one partner 'saving' 40% on the way in, only to pay 40% on the way out, if the other partner has an allowance going begging.

There's also the psychological impact of one partner having all the pension which can cause issues.

[Mr Squarekins]

Related to same area, regarding carry forward unused pension allowance from previous years,

How far back can you go? is is current year and previous 3 years? or current and previous 2 years?

Also, can use use spouses unused too? ( i don't believe so, but just checking).

Edited by Mr Squarekins on Saturday 17th December 08:01

[Carbon Sasquatch]

Mr Squarekins said:

Also, can use use spouses unused too? ( i don't believe so, but just checking).

You can't, but they can. You can give them the money to do it as long as they had a pension of some sort already in place and sufficient relevant earnings.

[Mr Squarekins]

Carbon Sasquatch said:

You can't, but they can. You can give them the money to do it as long as they had a pension of some sort already in place and sufficient relevant earnings.

Thanks. Do know how many years I can carry forward allowancies? Sometimes the wording says 'previous 3 years' but other times says 'three prior, e.g. current and prior 3'. - confused.

Edited by Mr Squarekins on Saturday 17th December 14:04

[Mogul]

Current + 3yrs = 4 x £40,000 (Annual Allowance) = £160,000 max. but only available for those with sufficient relevant earnings in the current year…

I.e., taken to the extreme… if spouse B earned £40k pa for those previous 3 years but made nil contributions in those years, there would be £120,000 of annual allowance available to carry forward, *but* if they had not earned a bean this year, technically, they could only contribute £2,880 net (£3,600 gross) this year…

It’s easy to forget that pension tax relief is exactly that, it is a form of relief from the burden of tax paid (or payable) in the current year and if you don’t (or are unable to) use it, you (can) lose it. It is not a mechanism to provide a tax refund for taxes paid in previous periods..

Saying that, if you feel lucky and are prepared to run the gauntlet of the Self Assessment regime…

Edited by Mogul on Saturday 17th December 09:59

[Mr Squarekins]

Mogul said:

Current + 3yrs = 4 x £40,000 (Annual Allowance) = £160,000 max. but only available for those with sufficient relevant earnings in the current year…

I.e., taken to the extreme… if spouse B earned £40k pa for those previous 3 years but made nil contributions in those years, there would be £120,000 of annual allowance available to carry forward, *but* if they had not earned a bean this year, technically, they could only contribute £2,880 net (£3,600 gross) this year…

It’s easy to forget that pension tax relief is exactly that, it is a form of relief from the burden of tax paid (or payable) in the current year and if you don’t (or are unable to) use it, you (can) lose it. It is not a mechanism to provide a tax refund for taxes paid in previous periods..

Saying that, if you feel lucky and are prepared to run the gauntlet of the Self Assessment regime…

Edited by Mogul on Saturday 17th December 09:59

Superb. Thanks for the great answer.

I'm just looking to dump a chunck of earnings before April into my salary sacrifice pension, so this gives me enough availble unused allowance, based on what I and my employer have put in during the current and previous three years. Thanks.

Edited by Mr Squarekins on Saturday 17th December 14:08

[irc]

WayOutWest said:

Won't the marginal tax rate from £100 to £125k be about 62% now in Scotland, in fact 64% if you are a PAYE employee (e.g including employee NICs).
Not far off two thirds of your money going to Wee Jimmy Krankie!

Looking at combined income tax and NI the rate is 54% between £43662 and £50k. As a one income household in that £43-£5k band I don't consider we are wealthy despite what the sNP think.

In my case though they are getting less tax rather than more as I'll pay anything after $43662 into a pension rather than pay 54% to the SNP.

[simoid]

irc said:

Looking at combined income tax and NI the rate is 54% between £43662 and £50k. As a one income household in that £43-£5k band I don't consider we are wealthy despite what the sNP think.

In my case though they are getting less tax rather than more as I'll pay anything after $43662 into a pension rather than pay 54% to the SNP.

That’s basically what the thinking behind the question was in a nutshell. If, say, A was earning £50k and B was £40k…. a more tabloid/clickbait version of the question would be “why should B put any money into a pension, when A can get so much relief*?”

• on the way in, anyway