Pension contributions and higher rate tax
Discussion
My partner has just accepted a new job and she is trying to work out what her pension contributions will be.
Her base salary is £50,000 and she will be paying in 5% by salary sacrifice, so she gives up £208 gross a month but the NET cost is only £120.
Her employer matches the 5% meaning her monthly contribution is £416, this is my math work anyway and could be wrong...
The complication is she also gets a £6000 car allowance which does not qualify as pensionable contribution, however it now makes her a higher rate tax payer. Therefore, does this influence the tax relief she gets on her pension, even if her contributions don’t increase as a result of the allowance?
Her base salary is £50,000 and she will be paying in 5% by salary sacrifice, so she gives up £208 gross a month but the NET cost is only £120.
Her employer matches the 5% meaning her monthly contribution is £416, this is my math work anyway and could be wrong...
The complication is she also gets a £6000 car allowance which does not qualify as pensionable contribution, however it now makes her a higher rate tax payer. Therefore, does this influence the tax relief she gets on her pension, even if her contributions don’t increase as a result of the allowance?
Edited by BucksFizz on Wednesday 22 January 21:08
My understanding is this:
Her taxable income will be £50,000 - £2,500 +£6,000 = £53,500.
Therefore she will pay the higher tax rate on £3,500 of income.
(This assumes she takes the car allowance as cash and not as a company car)
The car allowance pushes her into the higher tax band even after the 5% pension contribution has been deducted, therefore she is getting tax relief on her pension contribution at the higher rate.
If she chooses to pay more into the pension then that will reduce the amount on which the 40% tax is due.
Her taxable income will be £50,000 - £2,500 +£6,000 = £53,500.
Therefore she will pay the higher tax rate on £3,500 of income.
(This assumes she takes the car allowance as cash and not as a company car)
The car allowance pushes her into the higher tax band even after the 5% pension contribution has been deducted, therefore she is getting tax relief on her pension contribution at the higher rate.
If she chooses to pay more into the pension then that will reduce the amount on which the 40% tax is due.
Scrump said:
My understanding is this:
Her taxable income will be £50,000 - £2,500 +£6,000 = £53,500.
Therefore she will pay the higher tax rate on £3,500 of income.
(This assumes she takes the car allowance as cash and not as a company car)
The car allowance pushes her into the higher tax band even after the 5% pension contribution has been deducted, therefore she is getting tax relief on her pension contribution at the higher rate.
If she chooses to pay more into the pension then that will reduce the amount on which the 40% tax is due.
Thanks for that.Her taxable income will be £50,000 - £2,500 +£6,000 = £53,500.
Therefore she will pay the higher tax rate on £3,500 of income.
(This assumes she takes the car allowance as cash and not as a company car)
The car allowance pushes her into the higher tax band even after the 5% pension contribution has been deducted, therefore she is getting tax relief on her pension contribution at the higher rate.
If she chooses to pay more into the pension then that will reduce the amount on which the 40% tax is due.
Is it only the first £3500 that she'll earn tax relief at the higher rate?
She also gets a £7,500 annual bonus which is paid quarterly, again it doesn't contribute to her pension but the fact she pays more tax might give her more relief?
She will be a higher rate tax payer. She effectively gets tax relief on her pension contributions at the higher rate (as they are taken out before tax).
She won’t get tax relief on the £3,500. that is the amount she will pay the higher tax amount on, although it turns out it is actually £11,000 (£3,500 plus £7,500).
She won’t get tax relief on the £3,500. that is the amount she will pay the higher tax amount on, although it turns out it is actually £11,000 (£3,500 plus £7,500).
BucksFizz said:
Scrump said:
My understanding is this:
Her taxable income will be £50,000 - £2,500 +£6,000 = £53,500.
Therefore she will pay the higher tax rate on £3,500 of income.
(This assumes she takes the car allowance as cash and not as a company car)
The car allowance pushes her into the higher tax band even after the 5% pension contribution has been deducted, therefore she is getting tax relief on her pension contribution at the higher rate.
If she chooses to pay more into the pension then that will reduce the amount on which the 40% tax is due.
Thanks for that.Her taxable income will be £50,000 - £2,500 +£6,000 = £53,500.
Therefore she will pay the higher tax rate on £3,500 of income.
(This assumes she takes the car allowance as cash and not as a company car)
The car allowance pushes her into the higher tax band even after the 5% pension contribution has been deducted, therefore she is getting tax relief on her pension contribution at the higher rate.
If she chooses to pay more into the pension then that will reduce the amount on which the 40% tax is due.
Is it only the first £3500 that she'll earn tax relief at the higher rate?
She also gets a £7,500 annual bonus which is paid quarterly, again it doesn't contribute to her pension but the fact she pays more tax might give her more relief?
She is also making a £2.5k pension contribution, which is fully within her higher rate tax band, via salary sacrifice (so before any tax has even been deducted).
This reduces her taxable income to £60.5K (£63k minus her pension contribution).
So she is able to make a further £10.5k gross pension contribution and therefore remove herself completely from this tax bracket.
Assuming this were affordable it could make a great deal of sense.
If done via salary sacrifice then the total saving to her would be 42% (40% income tax and 2% NI in this band) and her employer would save an additional 13.8% employer NI contribution (which they may be willing to split).
Basically, circa half of her earnings in this bracket that would have otherwise gone in tax (one way or the other) could now go into her pension instead.
JulianPH said:
So, her basic is £50k + £7k bonus + £6k car allowance, meaning total taxable earnings of £63k (plus a £2.5k employer pension contribution, giving a total package of £65.5k).
She is also making a £2.5k pension contribution, which is fully within her higher rate tax band, via salary sacrifice (so before any tax has even been deducted).
This reduces her taxable income to £60.5K (£63k minus her pension contribution).
So she is able to make a further £10.5k gross pension contribution and therefore remove herself completely from this tax bracket.
Assuming this were affordable it could make a great deal of sense.
If done via salary sacrifice then the total saving to her would be 42% (40% income tax and 2% NI in this band) and her employer would save an additional 13.8% employer NI contribution (which they may be willing to split).
Basically, circa half of her earnings in this bracket that would have otherwise gone in tax (one way or the other) could now go into her pension instead.
That explains it brilliantly, thank you.She is also making a £2.5k pension contribution, which is fully within her higher rate tax band, via salary sacrifice (so before any tax has even been deducted).
This reduces her taxable income to £60.5K (£63k minus her pension contribution).
So she is able to make a further £10.5k gross pension contribution and therefore remove herself completely from this tax bracket.
Assuming this were affordable it could make a great deal of sense.
If done via salary sacrifice then the total saving to her would be 42% (40% income tax and 2% NI in this band) and her employer would save an additional 13.8% employer NI contribution (which they may be willing to split).
Basically, circa half of her earnings in this bracket that would have otherwise gone in tax (one way or the other) could now go into her pension instead.
Shes a higher rate tax payer for the first time and is looking forward to the extra cash, but at the same time she's a bit disgruntled paying so much in tax, so putting almost all of it in a pension is actually quite an interesting idea. Too bad she won't be able to access it for another 25 years.
Also, her employer will only contribute 5% and not the rest/some of the NI savings.
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