Increase taxable income to increase pension tax relief
Discussion
I have a part time PAYE income which I pay 7% salary sacrifice pension contributions on (employer pays 9%) and the remainder of the salary is 100% Additional Voluntary Contributions. I manage to stay in the 20% tax bracket and have contributed the maximum £60k in pension contributions for the last couple of years by topping up @ £11k of personal money. However, I have the option to pay myself from my Limited Company and was wondering whether it could be worthwhile paying myself just enough salary to place myself in the 40% tax bracket. If I have calculated things correctly, and assuming that things don't change in the budget, I think that I could be better off financially to the tune of @ £12000 per year. Without going into all the details of the calculations at this stage is it too good to be true or is it possible?
Thanks in advance.
Thanks in advance.
BAMoFo said:
I have a part time PAYE income which I pay 7% salary sacrifice pension contributions on (employer pays 9%) and the remainder of the salary is 100% Additional Voluntary Contributions. I manage to stay in the 20% tax bracket and have contributed the maximum £60k in pension contributions for the last couple of years by topping up @ £11k of personal money. However, I have the option to pay myself from my Limited Company and was wondering whether it could be worthwhile paying myself just enough salary to place myself in the 40% tax bracket. If I have calculated things correctly, and assuming that things don't change in the budget, I think that I could be better off financially to the tune of @ £12000 per year. Without going into all the details of the calculations at this stage is it too good to be true or is it possible?
Thanks in advance.
if you're paying 100% of your PAYE income into your pension (either via SS or via AVCs) how are you in the 20% tax bracket? Surely you'd still be within the Personal Allowance?Thanks in advance.
I don’t think this works, because you only get the relief at the marginal rate you would have actually paid tax at. Just creeping into the 40% bracket just gives you the extra relief on the small piece you would otherwise have paid 40% on.
You could (for example) pay yourself 60K out of your company and it would be tax free if you put it straight into your pension, but this would mean your PAYE income would be taxed in the normal way (and if you went right up to 60K it would obviously mean no contributions from other sources).
At the moment I’m not sure what value you get from your extra contribution from personal funds?
You could (for example) pay yourself 60K out of your company and it would be tax free if you put it straight into your pension, but this would mean your PAYE income would be taxed in the normal way (and if you went right up to 60K it would obviously mean no contributions from other sources).
At the moment I’m not sure what value you get from your extra contribution from personal funds?
Countdown said:
if you're paying 100% of your PAYE income into your pension (either via SS or via AVCs) how are you in the 20% tax bracket? Surely you'd still be within the Personal Allowance?
Yes - this doesn’t make sense to me either. It seems he is also putting money into a pension (personal allowance and some of his own funds) that would attract no tax relief whatsoever, so would be much more sensibly put into an ISA (where it wouldn’t be taxed on withdrawal).Foss62 said:
Countdown said:
if you're paying 100% of your PAYE income into your pension (either via SS or via AVCs) how are you in the 20% tax bracket? Surely you'd still be within the Personal Allowance?
Yes - this doesn’t make sense to me either. It seems he is also putting money into a pension (personal allowance and some of his own funds) that would attract no tax relief whatsoever, so would be much more sensibly put into an ISA (where it wouldn’t be taxed on withdrawal).BAMoFo said:
I am using personal funds to pay the extra money and it is declared as such in my SIPP and receives an uplift of 25% Thanks for your input regarding the marginal rate of tax. As it currently stands it is worth 6.25% to use personal funds to contribute to a basic rate tax payer's pension. It isn't the easiest thing to explain in a post though and could well be negated by future tax increases.
I'm not a pensions expert but AIUI the max you can pay into a pension is your earning for the year or £60k, whichever is the lower.If you're paying in ALL your earning into a pension I don't think you can get tax relief on any further payments into the pension (ignoring carryforward rules for simplicity sakes)
^^^^ yes you are correct that you can't pay more than you earn. I got mixed up and have remembered that I actually made the payments for the last two years from my Limited Company as a director so it wasn't limited by salary. The personal money that I used was to pay into my missus' pension to use up her unused allowance from the last 3 years.
BAMoFo said:
I am using personal funds to pay the extra money and it is declared as such in my SIPP and receives an uplift of 25% Thanks for your input regarding the marginal rate of tax. As it currently stands it is worth 6.25% to use personal funds to contribute to a basic rate tax payer's pension. It isn't the easiest thing to explain in a post though and could well be negated by future tax increases.
So if you’re getting 6.25% extra on the way in, is that worth losing 20% on the way out?Routemaster said:
BAMoFo said:
I am using personal funds to pay the extra money and it is declared as such in my SIPP and receives an uplift of 25% Thanks for your input regarding the marginal rate of tax. As it currently stands it is worth 6.25% to use personal funds to contribute to a basic rate tax payer's pension. It isn't the easiest thing to explain in a post though and could well be negated by future tax increases.
So if you’re getting 6.25% extra on the way in, is that worth losing 20% on the way out?‘On the way in’ Pay £80 into a pension. £80 plus 20% tax relief = £80 / 0.8 = £100 paid into the pension.
‘On the way out’ take 25% tax free lump sum so 0.25 * £100 = £25 tax free and £100 - £25 = £75 taxable. Tax on the remaining £75 = 0.2 * £75 = £15 therefore leaving £75 - £15 = £60 after tax.
The initial starting sum of £80 has increased to £60 + £25 = £85 which is a £5 increase or, expressed as a percentage, a 5/80*100 = 6.25% increase.
BAMoFo said:
Routemaster said:
BAMoFo said:
I am using personal funds to pay the extra money and it is declared as such in my SIPP and receives an uplift of 25% Thanks for your input regarding the marginal rate of tax. As it currently stands it is worth 6.25% to use personal funds to contribute to a basic rate tax payer's pension. It isn't the easiest thing to explain in a post though and could well be negated by future tax increases.
So if you’re getting 6.25% extra on the way in, is that worth losing 20% on the way out?‘On the way in’ Pay £80 into a pension. £80 plus 20% tax relief = £80 / 0.8 = £100 paid into the pension.
‘On the way out’ take 25% tax free lump sum so 0.25 * £100 = £25 tax free and £100 - £25 = £75 taxable. Tax on the remaining £75 = 0.2 * £75 = £15 therefore leaving £75 - £15 = £60 after tax.
The initial starting sum of £80 has increased to £60 + £25 = £85 which is a £5 increase or, expressed as a percentage, a 5/80*100 = 6.25% increase.
SunsetZed said:
I get your maths but you're tying up your money for a (potentially long, I've no idea how old you are) period of time for a small percentage uplift and whilst none of us know what future governments will do I think we'll pretty well all agree that it's far more likely that they'll be less generous than more. For example if that lump sum is reduced or if the age you can access the pension is increased how will you feel?
I agree with what you say but have taken a calculated risk because I will be 55 years old in less than 18 months. As a result my exposure time isn't particularly long. No way on earth would I have contemplated doing this if the timescales were significantly longer. Having a pension has been a novelty for me, because I only enrolled in one when I started the PAYE job 4 years ago, so I am trying to capitalise on it.BAMoFo said:
I think it is worth it, but any increase in future tax rates or changes to the tax free lump sum could scupper it. The calculations that I have made are below so please feel free to tell me if I have made a mistake.
‘On the way in’ Pay £80 into a pension. £80 plus 20% tax relief = £80 / 0.8 = £100 paid into the pension.
‘On the way out’ take 25% tax free lump sum so 0.25 * £100 = £25 tax free and £100 - £25 = £75 taxable. Tax on the remaining £75 = 0.2 * £75 = £15 therefore leaving £75 - £15 = £60 after tax.
The initial starting sum of £80 has increased to £60 + £25 = £85 which is a £5 increase or, expressed as a percentage, a 5/80*100 = 6.25% increase.
Assuming the above is correct, what happens if your total taxable withdrawals in a year take you into the 40% bracket?‘On the way in’ Pay £80 into a pension. £80 plus 20% tax relief = £80 / 0.8 = £100 paid into the pension.
‘On the way out’ take 25% tax free lump sum so 0.25 * £100 = £25 tax free and £100 - £25 = £75 taxable. Tax on the remaining £75 = 0.2 * £75 = £15 therefore leaving £75 - £15 = £60 after tax.
The initial starting sum of £80 has increased to £60 + £25 = £85 which is a £5 increase or, expressed as a percentage, a 5/80*100 = 6.25% increase.
I think it's a good idea to have savings outside of a pension wrapper to avoid that scenario.
BAMoFo said:
SunsetZed said:
I get your maths but you're tying up your money for a (potentially long, I've no idea how old you are) period of time for a small percentage uplift and whilst none of us know what future governments will do I think we'll pretty well all agree that it's far more likely that they'll be less generous than more. For example if that lump sum is reduced or if the age you can access the pension is increased how will you feel?
I agree with what you say but have taken a calculated risk because I will be 55 years old in less than 18 months. As a result my exposure time isn't particularly long. No way on earth would I have contemplated doing this if the timescales were significantly longer. Having a pension has been a novelty for me, because I only enrolled in one when I started the PAYE job 4 years ago, so I am trying to capitalise on it.Also at your age could you not just leave it invested where it is and then pump it in just before 55 (if that's when you're planning to take it out) so that there's no time for the rules to be changed?
omniflow said:
Assuming the above is correct, what happens if your total taxable withdrawals in a year take you into the 40% bracket?
I think it's a good idea to have savings outside of a pension wrapper to avoid that scenario.
I will ensure that my total taxable withdrawala never take me into the 40% tax bracket and have other savings such as maximising ISAs each year. I'm trying to cram as much as I can in before retiring at the age of 55 (assuming I can stomach hanging on for that long).I think it's a good idea to have savings outside of a pension wrapper to avoid that scenario.
SunsetZed said:
Understood and that helps but if you don't get the full tax free amount where does that leave you? I'd do a calculation with only a 100k tax free allowance and see if it still works out.
Also at your age could you not just leave it invested where it is and then pump it in just before 55 (if that's when you're planning to take it out) so that there's no time for the rules to be changed?
As always it is a trade off, but I'm trying to be as tax efficient as possible whilst spreading my eggs fairly widely. Waiting until just before I am 55 years old doesn't quite work because I have too much in cash that is currently unsheltered from tax. In hindsight I should have started the process earlier as the 'problem', albeit a nice one to have, is that I will need to find places to put money when I commence selling off rental properties.Also at your age could you not just leave it invested where it is and then pump it in just before 55 (if that's when you're planning to take it out) so that there's no time for the rules to be changed?
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