Lump Sum pension contribution - How am I taxed?

[interstellar]

Can anyone help me understand this one.

Basic is 90k a year and I am lucky to be getting a 35k bonus at the end of January. To avoid paying tax over the 100k threshold and losing my personal allowance and ending up in the 60% tax loophole for earnings between 100-125k I am going to pay some into my pension.

If I take 10k of it to top me up to 100k and then put the 25k into my pension what happens to the pension contribution? Is it correct that I will get a 20% (4k) tax refund at year end as tax relief or not?

nice problem to have but to earn £35k in bonus and only get 14k of it if I take it is harsh so I am trying to make the best of it by paying it into my pension

Can anyone explain it to me and let me know if I am doing the right thing?

[Mr Pointy]

Have look here:
https://www.hl.co.uk/pensions/tax-relief

You'll get 20% added to the value of any pension payment & if you pay 40% rate tax then another 20% can be claimed on your tax return. There are a few rules around how much you can contribute & you might want to investigate using unclaimed allowance from previous years if your bonus is going to be an ongoing event.

[ellroy]

Don't forget that the allowance you have each year may well have also been at least partially used by any company contribution made! So ensure you know what's gone in already before you make a payment.

[JulianPH]

You are along the right lines, though perhaps confusing gross and net contributions.

If you ask your employer to pay the £25k straight into your pension then this would be a gross contribution and therefore the whole 40% income tax is never deducted in the first place (so you will have no tax to reclaim).

If you make the contribution from taxed earnings then your pension provider will reclaim the basic rate of income tax for you and you will then be able to claim the higher rate back via your tax return for the financial year.

I would suggest you get your employer to make the gross contribution to your pension as this is more tax efficient for both of you.

[tighnamara]

JulianPH said:

You are along the right lines, though perhaps confusing gross and net contributions.

If you ask your employer to pay the £25k straight into your pension then this would be a gross contribution and therefore the whole 40% income tax is never deducted in the first place (so you will have no tax to reclaim).

If you make the contribution from taxed earnings then your pension provider will reclaim the basic rate of income tax for you and you will then be able to claim the higher rate back via your tax return for the financial year.

I would suggest you get your employer to make the gross contribution to your pension as this is more tax efficient for both of you.

Out of interest if OP has an existing pension with the company, how does the tax work if your contributions are over the yearly allowance for pensions.

[benbuhagiar]

It is best to do salary sacrifice if possible.

[rfisher]

'60% tax loophole for earnings between 100-125k'

That bit has confused me.

Anyone care to explain.

Ta.

[interstellar]

rfisher said:

'60% tax loophole for earnings between 100-125k'

That bit has confused me.

Anyone care to explain.

Ta.

Once you start earning over 100k you start to lose your personal allowance, every £1 of allowance disappears with every £2 earned so if you take home 120k not only are you taxed at 40% but you then have to pay an addition 20% of the 20k as you have lost all your allowance which means a tax bill for another 4k, painful

https://www.kirkrice.co.uk/blog/personal-allowance...

[JulianPH]

tighnamara said:

JulianPH said:

You are along the right lines, though perhaps confusing gross and net contributions.

If you ask your employer to pay the £25k straight into your pension then this would be a gross contribution and therefore the whole 40% income tax is never deducted in the first place (so you will have no tax to reclaim).

If you make the contribution from taxed earnings then your pension provider will reclaim the basic rate of income tax for you and you will then be able to claim the higher rate back via your tax return for the financial year.

I would suggest you get your employer to make the gross contribution to your pension as this is more tax efficient for both of you.

Out of interest if OP has an existing pension with the company, how does the tax work if your contributions are over the yearly allowance for pensions.

You cannot receive tax relief on any contributions that exceed your net relevant earnings (and the annual contribution cap), with some exemptions;

• Everyone can make an annual £3,600 gross (£2,880 net) pension contribution regardless of earnings each year

• If your (or your employer's) contributions are over your annual allowance then provided you have had a pension scheme (of any sort) in place for the years concerned then you can use the available allowance for up to the last 3 tax years (on top of the current one) to make contributions that will attract full tax relief.

• This contribution does not have to be invested into the pension scheme you had in the tax year you are claiming for. It can be invested into any pension scheme you like (including a brand new one). The law simply states you must have had a pension scheme in place during that/those tax year(s). It does not matter if you contributed to it or not and it doesn't matter if you now want to contribute that year's allowance to a completely different scheme.

• You can also receive full tax relief on employer pension contributions in excess of your net relevant earnings (but within the annual £40k cap)

• Finally, not everyone has a £40k annual cap. Highest rate tax payers have a £10k cap and those drawing benefits from a pension have a £4k cap.

[interstellar]

JulianPH said:

You are along the right lines, though perhaps confusing gross and net contributions.

If you ask your employer to pay the £25k straight into your pension then this would be a gross contribution and therefore the whole 40% income tax is never deducted in the first place (so you will have no tax to reclaim).

If you make the contribution from taxed earnings then your pension provider will reclaim the basic rate of income tax for you and you will then be able to claim the higher rate back via your tax return for the financial year.

I would suggest you get your employer to make the gross contribution to your pension as this is more tax efficient for both of you.

I am still not 100% clear if I am honest. I don’t pay a massive amount in each month only 3% of salary so £150 after tax deduction and my employer pays 8% so about £400 so £550 total.

The deduction is taken from gross as I understand it so I am not paying tax on it so I assume there is no claim for tax relief at the end of the financial year , correct?

[Happy Jim]

interstellar said:

I am still not 100% clear if I am honest. I don’t pay a massive amount in each month only 3% of salary so £150 after tax deduction and my employer pays 8% so about £400 so £550 total.

The deduction is taken from gross as I understand it so I am not paying tax on it so I assume there is no claim for tax relief at the end of the financial year , correct?

Between you and your employer you will pay in 11% of your salary (Gross, 3% plus 8%) into your pension. This uses up £9,900 of your max this year (£40K contribution cap).

You need to speak to your payroll bods to make sure they can dump £25K of your Bonus directly into your pension (Gross), if they can then you will have bumped your pension up by £34,900 this year.

This leaves you receiving £10K of your Bonus....Net sadly so knock off Tax and NI, £5,800 in your pocket.

That’s it,nothing else to claim back etc

Cheers

Jim

Edited by Happy Jim on Monday 17th December 22:03

[JulianPH]

interstellar said:

The deduction is taken from gross as I understand it so I am not paying tax on it so I assume there is no claim for tax relief at the end of the financial year , correct?

As Jim has said above, correct!

[interstellar]

Thanks all, appreciate it.

[tighnamara]

JulianPH said:

You cannot receive tax relief on any contributions that exceed your net relevant earnings (and the annual contribution cap), with some exemptions;

• Everyone can make an annual £3,600 gross (£2,880 net) pension contribution regardless of earnings each year

• If your (or your employer's) contributions are over your annual allowance then provided you have had a pension scheme (of any sort) in place for the years concerned then you can use the available allowance for up to the last 3 tax years (on top of the current one) to make contributions that will attract full tax relief.

• This contribution does not have to be invested into the pension scheme you had in the tax year you are claiming for. It can be invested into any pension scheme you like (including a brand new one). The law simply states you must have had a pension scheme in place during that/those tax year(s). It does not matter if you contributed to it or not and it doesn't matter if you now want to contribute that year's allowance to a completely different scheme.

• You can also receive full tax relief on employer pension contributions in excess of your net relevant earnings (but within the annual £40k cap)

• Finally, not everyone has a £40k annual cap. Highest rate tax payers have a £10k cap and those drawing benefits from a pension have a £4k cap.

Thanks, interesting.

[interstellar]

JulianPH said:

interstellar said:

The deduction is taken from gross as I understand it so I am not paying tax on it so I assume there is no claim for tax relief at the end of the financial year , correct?

As Jim has said above, correct!

I trust you chaps on this but inland revenue have just told me otherwise. I had to call them for another reason but did ask for clarification on it. I used the example of basic effectively being 100k and not wanting to lose my personal allowance so what happens if i put 20k into my pension.

I said it would be a gross contribution so before tax of 20k (If I took it as bonus I would get 8k due to losing personal allowance) and she told me yes it woulds go in with the 20% (4k) contribution from the government to make it 24k and I would then claim the extra 20% (another 4k) through my self assessment in May/June time.

12k or effectively 28k?

Surely not?

[mfmman]

JulianPH said:

• Everyone can make an annual £3,600 gross (£2,880 net) pension contribution regardless of earnings each year

• If your (or your employer's) contributions are over your annual allowance then provided you have had a pension scheme (of any sort) in place for the years concerned then you can use the available allowance for up to the last 3 tax years (on top of the current one) to make contributions that will attract full tax relief.

A quick question on the bolded bit

My wife doesn't earn enough to pay tax or be in a company pension at present. She does have a few DB (Yes I am sure they are DB this time ) pension from previous employment, prior to given up work when starting a family. Would these qualify as provided you have had a pension scheme (of any sort) in place for the years concerned to gain the tax benefit. There has been no contribution to them for 15 years +

Edited by mfmman on Thursday 3rd January 11:20

[JulianPH]

interstellar said:

JulianPH said:

interstellar said:

The deduction is taken from gross as I understand it so I am not paying tax on it so I assume there is no claim for tax relief at the end of the financial year , correct?

As Jim has said above, correct!

I trust you chaps on this but inland revenue have just told me otherwise. I had to call them for another reason but did ask for clarification on it. I used the example of basic effectively being 100k and not wanting to lose my personal allowance so what happens if i put 20k into my pension.

I said it would be a gross contribution so before tax of 20k (If I took it as bonus I would get 8k due to losing personal allowance) and she told me yes it woulds go in with the 20% (4k) contribution from the government to make it 24k and I would then claim the extra 20% (another 4k) through my self assessment in May/June time.

12k or effectively 28k?

Surely not?

I can assure you she has got it wrong!

You cannot have a gross contribution before tax. That is a net contribution!

[JulianPH]

mfmman said:

JulianPH said:

• Everyone can make an annual £3,600 gross (£2,880 net) pension contribution regardless of earnings each year

• If your (or your employer's) contributions are over your annual allowance then provided you have had a pension scheme (of any sort) in place for the years concerned then you can use the available allowance for up to the last 3 tax years (on top of the current one) to make contributions that will attract full tax relief.

A quick question on the bolded bit

My wife doesn't earn enough to pay tax or be in a company pension at present. She does have a few DB (Yes I am sure they are DB this time ) pension from previous employment, prior to given up work when starting a family. Would these qualify as provided you have had a pension scheme (of any sort) in place for the years concerned to gain the tax benefit. There has been no contribution to them for 15 years +

Edited by mfmman on Thursday 3rd January 11:20

Provided it is a Registered Pension Scheme it doesn't make any difference whether it is DB or MP. It equally does not matter when she last contributed.

Cheers

[interstellar]

JulianPH said:

interstellar said:

JulianPH said:

interstellar said:

The deduction is taken from gross as I understand it so I am not paying tax on it so I assume there is no claim for tax relief at the end of the financial year , correct?

As Jim has said above, correct!

I trust you chaps on this but inland revenue have just told me otherwise. I had to call them for another reason but did ask for clarification on it. I used the example of basic effectively being 100k and not wanting to lose my personal allowance so what happens if i put 20k into my pension.

I said it would be a gross contribution so before tax of 20k (If I took it as bonus I would get 8k due to losing personal allowance) and she told me yes it woulds go in with the 20% (4k) contribution from the government to make it 24k and I would then claim the extra 20% (another 4k) through my self assessment in May/June time.

12k or effectively 28k?

Surely not?

I can assure you she has got it wrong!

You cannot have a gross contribution before tax. That is a net contribution!

Maybe its me getting confused but I know when i pay my pension contributions I am not taxed so how does this work?



How to legally avoid the 60% tax
If you are caught in the 60% tax trap, there is a way to get around it without taking a pay cut. You just need to up your pension contributions.
Someone earning £123,000 who made a £18,400 net contribution to their pension would find themselves in a much more favourable tax position, according to EQ Investors.
The contribution would benefit from basic rate tax relief, increasing it to £23,000. This reduces your net income to £100,000 meaning you regain your entire Personal Allowance.
The person would then pay £9,200 less Income Tax and get £4,600 tax relief on the pension contribution. That is effectively 60% tax relief on the pension contribution.
Plus, when you fill out your tax return you can claim higher rate tax relief on the pension contribution.

[mfmman]

JulianPH said:

Provided it is a Registered Pension Scheme it doesn't make any difference whether it is DB or MP. It equally does not matter when she last contributed.

Cheers

Don't have details to hand but from financial services companies that she was employed by like Friends Provident and London Life, Thanks