Minimising tax via pension

[alock]

Things have settled down a bit in my life recently, and I've decided I've had enough of paying 40% income tax, so my plan is to put all income currently taxed at this level into a pension.

Assume the following yearly income:
PAYE = £60k
Sole trader contracting = £5k
Dividends = £3k

The easy part is to tell my employer to salary sacrifice £10k straight into my pension. How do I structure the rest so I can also put the £5k contracting income straight into my pension, while keeping £2k of the dividend tax free, and the remaining £1k at the dividend tax rate?

Does the online self-assessment app do this for free?

[WhiskyDisco]

You'd be best off sacrificing £18k and receiving the NI benefit from your employer in addition to the income tax break.

[alock]

The contracting is a bit hit and miss as to how much I actually invoice in a year. The last two years have actually been £2k and £9k.

I don't know how happy my employer would be changing my salary sacrifice amount on a month by month basis.

[98elise]

alock said:

The contracting is a bit hit and miss as to how much I actually invoice in a year. The last two years have actually been £2k and £9k.

I don't know how happy my employer would be changing my salary sacrifice amount on a month by month basis.

You could put the contractor earnings into a SIPP

[alock]

98elise said:

alock said:

The contracting is a bit hit and miss as to how much I actually invoice in a year. The last two years have actually been £2k and £9k.

I don't know how happy my employer would be changing my salary sacrifice amount on a month by month basis.

You could put the contractor earnings into a SIPP

So in my original example, I have £8k in my bank account at the end of the year. £5k from contracting and £3k from dividends.

I then pay £5k into a SIPP.

How do I highlight this on my tax return? That the £5k taxable at 40% went into the SIPP, and of the £3k remaining, £2k is tax free and the remaining £1k is at 32.5%.

[98elise]

alock said:

98elise said:

alock said:

The contracting is a bit hit and miss as to how much I actually invoice in a year. The last two years have actually been £2k and £9k.

I don't know how happy my employer would be changing my salary sacrifice amount on a month by month basis.

You could put the contractor earnings into a SIPP

So in my original example, I have £8k in my bank account at the end of the year. £5k from contracting and £3k from dividends.

I then pay £5k into a SIPP.

How do I highlight this on my tax return? That the £5k taxable at 40% went into the SIPP, and of the £3k remaining, £2k is tax free and the remaining £1k is at 32.5%.

I don't know unfortunately. I contracted through a ltd company so my SIPP contributions were paid direct from the company account (so pre tax).

I'm sure someone else will know though. It's quite common to use a pension to avoid 40% tax, and a SIPP is an easy way to invest irregular lump sums.

[supersport]

You fill in your tax return declaring all your income and pension contributions.

If you have enough income in the 40% bracket to cover the pension contributions you get the tax back. If not, then you only get it back on that bit of income that you paid 40% on.