Fiscal drag and my tax
Discussion
Hello
I think I have this worked out but if anyone who knows what they are doing could let me know that would be lovely.
I earn just under 60 grand a year on a PAYE basis.
I make overpayment into my pension every month. I also make compulsory payments into my employers pension scheme every month PAYE.
I earnt in the last tax year £611.29 in interest which was paid to me gross on savings.
So, my net adjusted income for child benefit purposes (yes yes I know but I don't make the rules) is my fte salary, plus my savings interest less my pension contributions which brings me in at just and very uncomfortably under 50k net adjusted salary, so no tax return needed.
In terms of my savings interest, I am not sure what I need to do and the guidelines aren't clear. I know basic rate taxpayers get 1k savings interest tax free and higher rate gets £500.
Given my salary sacrifice none of my income comes in the higher rate tax banding so I assume, and this is the question I guess- that I benefit from the 1k personal savings allowance? Or does HMRC only look at your gross income when calculating your personal savings allowance?
If I am wrong and I owe tax on my savings then my understanding is they will write to me and tell me I owe them whatever the small amount is on the interest and they will adjust my tax code and no self assessment is needed?
My affairs are complicated also by the fact I might be receiving an additional 4k gross in income from work which is a backdated payrise and that would be payable in either January or Feb. I'd then need to dump the lot into my pension to avoid a tax charge on the child benefit. The timing on that might be very bad so do I assume that as soon as the money hits my account I dump it into my pension and then do a tax return to tell HMRC that's what I have done and my net adjusted income remains below 50k?
I think I have this worked out but if anyone who knows what they are doing could let me know that would be lovely.
I earn just under 60 grand a year on a PAYE basis.
I make overpayment into my pension every month. I also make compulsory payments into my employers pension scheme every month PAYE.
I earnt in the last tax year £611.29 in interest which was paid to me gross on savings.
So, my net adjusted income for child benefit purposes (yes yes I know but I don't make the rules) is my fte salary, plus my savings interest less my pension contributions which brings me in at just and very uncomfortably under 50k net adjusted salary, so no tax return needed.
In terms of my savings interest, I am not sure what I need to do and the guidelines aren't clear. I know basic rate taxpayers get 1k savings interest tax free and higher rate gets £500.
Given my salary sacrifice none of my income comes in the higher rate tax banding so I assume, and this is the question I guess- that I benefit from the 1k personal savings allowance? Or does HMRC only look at your gross income when calculating your personal savings allowance?
If I am wrong and I owe tax on my savings then my understanding is they will write to me and tell me I owe them whatever the small amount is on the interest and they will adjust my tax code and no self assessment is needed?
My affairs are complicated also by the fact I might be receiving an additional 4k gross in income from work which is a backdated payrise and that would be payable in either January or Feb. I'd then need to dump the lot into my pension to avoid a tax charge on the child benefit. The timing on that might be very bad so do I assume that as soon as the money hits my account I dump it into my pension and then do a tax return to tell HMRC that's what I have done and my net adjusted income remains below 50k?
Edited by princeperch on Wednesday 21st December 11:32
You should benefit from the £1000 savings allowance if you are salary sacrificing enough - and you have already rightly stated that interest should be added to your income in determining tax band for your own calculations. HMRC don't care about your reference/gross salary before sacrifices.
What may complicate this further is if you have any company benefits such as healthcare, which can easily add a grand or two as a taxable benefit.
I'd err on the side of caution by salary sacrificing slightly more than needed to keep comfortably under the threshold.
In general I'd also choose 100% salary sacrifice work pension contributions in preference to splitting contributions into a separate personal pension or SIPP (if that is what you are alluding to).
That goes even if the fund choice isn't great in the work pension. Because the National Insurance savings boost aspect of salary sacrifice pension contributions will usually - for most people - make up for a lack of investment choices. I've certainly changed my approach since moving to a salary sacrifice scheme, and turned off taps to a SIPP. You can always transfer it all over to a SIPP some time in the future.
However the disadvantage of a salary sacrifice work scheme over personal contributions to a separate pension is the lack of control & timing element for ad hoc stuff like fully offsetting bonuses or backpay, as you mentioned.
To offset those bonuses via SS you would have to had already jacked up your % contributions and spread throughout the year.
So you will still need to use personal pension ad hoc contributions to avoid going over the 40% threshold, for this tax year at least.
What may complicate this further is if you have any company benefits such as healthcare, which can easily add a grand or two as a taxable benefit.
I'd err on the side of caution by salary sacrificing slightly more than needed to keep comfortably under the threshold.
In general I'd also choose 100% salary sacrifice work pension contributions in preference to splitting contributions into a separate personal pension or SIPP (if that is what you are alluding to).
That goes even if the fund choice isn't great in the work pension. Because the National Insurance savings boost aspect of salary sacrifice pension contributions will usually - for most people - make up for a lack of investment choices. I've certainly changed my approach since moving to a salary sacrifice scheme, and turned off taps to a SIPP. You can always transfer it all over to a SIPP some time in the future.
However the disadvantage of a salary sacrifice work scheme over personal contributions to a separate pension is the lack of control & timing element for ad hoc stuff like fully offsetting bonuses or backpay, as you mentioned.
To offset those bonuses via SS you would have to had already jacked up your % contributions and spread throughout the year.
So you will still need to use personal pension ad hoc contributions to avoid going over the 40% threshold, for this tax year at least.
Following this with interest as I'm in a slightly similar situation at the moment, but going the other way. I think practically you're right in terms of reducing your tax liability, but I'm curious about the logic of tying up what sounds like several thousand pounds for, I'm guessing 30ish years, to save a couple of hundred quid in tax.
Of course it depends on your situation, and I haven't actually done the NPV calculation for my circumstances, but I'm accepting paying more tax overall to have more cash now, rather than put it in a pension I can't access for the best part of 25 years.
Of course it depends on your situation, and I haven't actually done the NPV calculation for my circumstances, but I'm accepting paying more tax overall to have more cash now, rather than put it in a pension I can't access for the best part of 25 years.
My logic is the child benefit is free money so I'll take it. If my salary was 70k or more then it's more borderline as I'd be lumping a disproportionate amount into the pension to keep what amounts to only about 3k gross (1700 ish net) of income from the child benefit.
But I plan to take (health permitting) my pension in my 50s so it will be quite heavily actuarially reduced so it makes sense for me to lump as much into it as I can for now to bridge that reduction. So I don't mind chucking a fair amount into my pension for the time being.
I'm sailing very close to the wind however on the net adjusted salary so will possibly need to keep a close eye on it over the next few months and write a large cheque for my pension in February or march. If I get the 4 or 5k payment from work I can't see anyway around doing a tax return.
But I plan to take (health permitting) my pension in my 50s so it will be quite heavily actuarially reduced so it makes sense for me to lump as much into it as I can for now to bridge that reduction. So I don't mind chucking a fair amount into my pension for the time being.
I'm sailing very close to the wind however on the net adjusted salary so will possibly need to keep a close eye on it over the next few months and write a large cheque for my pension in February or march. If I get the 4 or 5k payment from work I can't see anyway around doing a tax return.
I don’t understand the reluctance in these parts to do tax returns. Whether a tax return is demanded of you or not, if is often the easiest way of accomplishing what people seen to prefer to go about in the most difficult of ways. The HMRC on-line filing software is superb. Filing a tax return takes less than 20 minutes and guarantees that everything is squared off.
Kirkmoly said:
I don’t understand the reluctance in these parts to do tax returns.
Because lots of us have zero interest in filling in forms we don't understand?I have a University degree, a post doctorate, two Diplomas, and currently completing a MsC. At work am managing/leading projects that have so much complexity that I can spend 1hr just talking about the RAID log if someone really asked me. I just did my self assessment it took me 5 mintues, I literally just clicked the No button for everything.
I'm 100% sure my tax return is 100% incorrect, but 2hrs spent reading the 'Guidance' online and I still couldn't understand a word of it. Oh I also got an A* grade in Maths and A in addtional Maths at GCSE + A at Maths + Physics at A level(90%+ actual grade for both)..........
So I understand/love numbers and their power to predict, but also the need for detail/bias/context when dealing with datasets etc. For the day job I essentially have to articulate text book odds ratios into real life consequences of risk, to the point of having to drisupt real time Type 1 thinking order to ensure appropriate real world applications of risk mitigation. But honestly the self assessment tax return form might as well be written in sandscript.
I'm now in the process of finding an accountant, as am certain I'm breaching the pension tax free limits consistently already despite been 40 due to all the additional activity at work last few years (NHS scheme).
I marvel at people like you who find tax simple to understand.
Edited by gangzoom on Friday 23 December 06:11
gangzoom said:
Kirkmoly said:
I don’t understand the reluctance in these parts to do tax returns.
Because lots of us have zero interest in filling in forms we don't understand?I have a University degree, a post doctorate, two Diplomas, and currently completing a MsC. At work am managing/leading projects that have so much complexity that I can spend 1hr just talking about the RAID log if someone really asked me. I just did my self assessment it took me 5 mintues, I literally just clicked the No button for everything.
I'm 100% sure my tax return is 100% incorrect, but 2hrs spent reading the 'Guidance' online and I still couldn't understand a word of it. Oh I also got an A* grade in Maths and A in addtional Maths at GCSE + A at Maths + Physics at A level(90%+ actual grade for both)..........
So I understand/love numbers and their power to predict, but also the need for detail/bias/context when dealing with datasets etc. For the day job I essentially have to articulate text book odds ratios into real life consequences of risk, to the point of having to drisupt real time Type 1 thinking order to ensure appropriate real world applications of risk mitigation. But honestly the self assessment tax return form might as well be written in sandscript.
I'm now in the process of finding an accountant, as am certain I'm breaching the pension tax free limits consistently already despite been 40 due to all the additional activity at work last few years (NHS scheme).
I marvel at people like you who find tax simple to understand.
Edited by gangzoom on Friday 23 December 06:11
hepy said:
gangzoom said:
Kirkmoly said:
I don’t understand the reluctance in these parts to do tax returns.
Because lots of us have zero interest in filling in forms we don't understand?I have a University degree, a post doctorate, two Diplomas, and currently completing a MsC. At work am managing/leading projects that have so much complexity that I can spend 1hr just talking about the RAID log if someone really asked me. I just did my self assessment it took me 5 mintues, I literally just clicked the No button for everything.
I'm 100% sure my tax return is 100% incorrect, but 2hrs spent reading the 'Guidance' online and I still couldn't understand a word of it. Oh I also got an A* grade in Maths and A in addtional Maths at GCSE + A at Maths + Physics at A level(90%+ actual grade for both)..........
So I understand/love numbers and their power to predict, but also the need for detail/bias/context when dealing with datasets etc. For the day job I essentially have to articulate text book odds ratios into real life consequences of risk, to the point of having to drisupt real time Type 1 thinking order to ensure appropriate real world applications of risk mitigation. But honestly the self assessment tax return form might as well be written in sandscript.
I'm now in the process of finding an accountant, as am certain I'm breaching the pension tax free limits consistently already despite been 40 due to all the additional activity at work last few years (NHS scheme).
I marvel at people like you who find tax simple to understand.
Edited by gangzoom on Friday 23 December 06:11
Really good post by wayoutwest above, covers much of the key considerations.
I would always favour sal sac via work pension so you receive the NI saving too and if you are still in repayment for student loan, the monthly repayment is reduced as your sal sac pension contributions increase ...not a 'saving' as such but your are deferring X amount of SL repayment ... I'd rather be putting that extra income into my pension now in the hope the growth will outstrip any interest on the student loan.
I was in a similar predicament earlier this year, a few unexpected pay increases and bonuses bumped up my adj net income over the HICBC threshold for 21-22 so made SIPP contributions to avoid the charge.
Overall you are on the right path in terms of approach, I changed roles this year and my previous salary was ballpark not far off yours...when you are that close to the HICBC threshold and your employer offers pension sal sac then IMO it's a no brainer to bump up your contributions accordingly. Once you start moving further up the pay grades it becomes a bit trickier and as already mentioned taxable benefits complicated the calculations.
FWIW I've made a decision recently to rebalance between pension / take home / clearing student loan...I went all out on the pension for the last two years but won't be able to sustain so now take the view that as long as reasonable monthly contributions are maintained AND the investment options are optimised to the extent possible for age/risk tolerance etc then that's all one can do.
I was asked to complete my first ever SA last year, was relatively straightforward but the guidance if you can call it that is simply crap and opaque...no idea if done intentionally or because they don't have folks who know how to set out clear and concise guidelines but nothing new there....
I would always favour sal sac via work pension so you receive the NI saving too and if you are still in repayment for student loan, the monthly repayment is reduced as your sal sac pension contributions increase ...not a 'saving' as such but your are deferring X amount of SL repayment ... I'd rather be putting that extra income into my pension now in the hope the growth will outstrip any interest on the student loan.
I was in a similar predicament earlier this year, a few unexpected pay increases and bonuses bumped up my adj net income over the HICBC threshold for 21-22 so made SIPP contributions to avoid the charge.
Overall you are on the right path in terms of approach, I changed roles this year and my previous salary was ballpark not far off yours...when you are that close to the HICBC threshold and your employer offers pension sal sac then IMO it's a no brainer to bump up your contributions accordingly. Once you start moving further up the pay grades it becomes a bit trickier and as already mentioned taxable benefits complicated the calculations.
FWIW I've made a decision recently to rebalance between pension / take home / clearing student loan...I went all out on the pension for the last two years but won't be able to sustain so now take the view that as long as reasonable monthly contributions are maintained AND the investment options are optimised to the extent possible for age/risk tolerance etc then that's all one can do.
I was asked to complete my first ever SA last year, was relatively straightforward but the guidance if you can call it that is simply crap and opaque...no idea if done intentionally or because they don't have folks who know how to set out clear and concise guidelines but nothing new there....
Edited by VR99 on Saturday 24th December 00:06
hepy said:
I have a bronze swimming certificate and doing the tax return is straightforward.
I have a cycling proficiency badge from 1985 so I'm ok.I find the people that least understand tax get employed by HMRC. It's completely pot luck on who you get after sitting on hold for an hour. When sorting out 21/22 I had one guy completely mess things up which luckily the next lady was able to unwind for me.
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