Pension Advice - Pay rise into higher rate tax band

[romeogolf]

My partner has just received a pretty sizable pay rise taking his gross salary from £48,000 to £56,000.

From reading various threads on here I have a loose understanding that there a benefits to making additional pension contributions as a higher rate tax payer and would be interested to know if anyone here has any wisdom they can offer on this.

He currently pays into his employer's pension scheme which appears to be a "relief at source" arrangement. His payments are about 7% and they contribute 3%.

He wants to increase this while he can afford it and also to make the most of a large pay rise.

For background he will be 30 this year.

Any advice welcome

[TwigtheWonderkid]

Easiest way would be to ask employer to pay £6K a year directly into pension (in addition to all other contributions) as salary sacrifice, and reduce the take home salary to £50K. If he was earning that £6K, he'd only receive £3600 of it. This way, he receives the full £6K into his pension. So his £3600 becomes £6K on day one, that's a 66.66% return when most savings accounts will pay you 0.5% a year!!!

[anonymous-user]

romeogolf said:

His payments are about 7% and they contribute 3%.

Definitely do it. 10% pension savings aren't enough.

romeogolf said:

He wants to increase this while he can afford it and also to make the most of a large pay rise.

Needs to be at least 15% and preferably 20% to get a decent outcome.

If he's earning £56k headline salary and already contributing 7% I reckon his remaining taxable pay is about £52k, meaning £2,000 taxed at 40% - so pocket some 40% tax relief while you can.

To increase overall saving be sure to use ISA as well. Different tax relief structure but, and here's the big point, no need to wait until "official retirement age" before being able to draw on it. Can be very handy in an early retirement scenario.

[CarlosFandango11]

TwigtheWonderkid said:

Easiest way would be to ask employer to pay £6K a year directly into pension (in addition to all other contributions) as salary sacrifice, and reduce the take home salary to £50K. If he was earning that £6K, he'd only receive £3600 of it. This way, he receives the full £6K into his pension. So his £3600 becomes £6K on day one, that's a 66.66% return when most savings accounts will pay you 0.5% a year!!!

40% income tax is paid on income above £50,270.
As he’s already contributing about 7% to his pension, so taxable salary net is about £52,080.
So salary sacrifice of about £1,810 is what’s required to stay out of the 40% income tax band.
This is assuming no other income like bonuses.

[TwigtheWonderkid]

CarlosFandango11 said:

TwigtheWonderkid said:

Easiest way would be to ask employer to pay £6K a year directly into pension (in addition to all other contributions) as salary sacrifice, and reduce the take home salary to £50K. If he was earning that £6K, he'd only receive £3600 of it. This way, he receives the full £6K into his pension. So his £3600 becomes £6K on day one, that's a 66.66% return when most savings accounts will pay you 0.5% a year!!!

40% income tax is paid on income above £50,270.
As he’s already contributing about 7% to his pension, so taxable salary net is about £52,080.
So salary sacrifice of about £1,810 is what’s required to stay out of the 40% income tax band.
This is assuming no other income like bonuses.

Good point. But whatever the figure, just limit take home salary to £50K and everything else into pension. Maybe even more into pension of possible, 20% tax saving is better than nothing.

[romeogolf]

TwigtheWonderkid said:

CarlosFandango11 said:

TwigtheWonderkid said:

Easiest way would be to ask employer to pay £6K a year directly into pension (in addition to all other contributions) as salary sacrifice, and reduce the take home salary to £50K. If he was earning that £6K, he'd only receive £3600 of it. This way, he receives the full £6K into his pension. So his £3600 becomes £6K on day one, that's a 66.66% return when most savings accounts will pay you 0.5% a year!!!

40% income tax is paid on income above £50,270.
As he’s already contributing about 7% to his pension, so taxable salary net is about £52,080.
So salary sacrifice of about £1,810 is what’s required to stay out of the 40% income tax band.
This is assuming no other income like bonuses.

Good point. But whatever the figure, just limit take home salary to £50K and everything else into pension. Maybe even more into pension of possible, 20% tax saving is better than nothing.

How would this work with his employer? Looking at his current pay slips his pension is deducted after tax - Would this need to be changed?

[TwigtheWonderkid]

romeogolf said:

TwigtheWonderkid said:

CarlosFandango11 said:

TwigtheWonderkid said:

Easiest way would be to ask employer to pay £6K a year directly into pension (in addition to all other contributions) as salary sacrifice, and reduce the take home salary to £50K. If he was earning that £6K, he'd only receive £3600 of it. This way, he receives the full £6K into his pension. So his £3600 becomes £6K on day one, that's a 66.66% return when most savings accounts will pay you 0.5% a year!!!

40% income tax is paid on income above £50,270.
As he’s already contributing about 7% to his pension, so taxable salary net is about £52,080.
So salary sacrifice of about £1,810 is what’s required to stay out of the 40% income tax band.
This is assuming no other income like bonuses.

Good point. But whatever the figure, just limit take home salary to £50K and everything else into pension. Maybe even more into pension of possible, 20% tax saving is better than nothing.

How would this work with his employer? Looking at his current pay slips his pension is deducted after tax - Would this need to be changed?

Doesn't have to be. He could just arrange to pay the excess money in himself. The pension co will adjust to add on the 20%,basic tax, and he'll need to contact HMRC about the other 20%. But it's just easier if the employer agrees to do it by salary sacrifice.

[CarlosFandango11]

TwigtheWonderkid said:

romeogolf said:

TwigtheWonderkid said:

CarlosFandango11 said:

TwigtheWonderkid said:

Easiest way would be to ask employer to pay £6K a year directly into pension (in addition to all other contributions) as salary sacrifice, and reduce the take home salary to £50K. If he was earning that £6K, he'd only receive £3600 of it. This way, he receives the full £6K into his pension. So his £3600 becomes £6K on day one, that's a 66.66% return when most savings accounts will pay you 0.5% a year!!!

40% income tax is paid on income above £50,270.
As he’s already contributing about 7% to his pension, so taxable salary net is about £52,080.
So salary sacrifice of about £1,810 is what’s required to stay out of the 40% income tax band.
This is assuming no other income like bonuses.

Good point. But whatever the figure, just limit take home salary to £50K and everything else into pension. Maybe even more into pension of possible, 20% tax saving is better than nothing.

How would this work with his employer? Looking at his current pay slips his pension is deducted after tax - Would this need to be changed?

Doesn't have to be. He could just arrange to pay the excess money in himself. The pension co will adjust to add on the 20%,basic tax, and he'll need to contact HMRC about the other 20%. But it's just easier if the employer agrees to do it by salary sacrifice.

He would save a small amount of NI going via salary sacrifice in addition to the income tax, maybe £50 to £100.

[B9]

Lots of focus on the 40% saving (plus 2% NI if via salary sacrifice).

But don't rule out there's still a 32% saving on earnings under £50k if you can salary sacrifice, as the NI rate is 12%!

Of course, you don't want to depress your take home too much. Need to enjoy life

Edited by B9 on Friday 16th April 15:36

[anotherbigspender]

Apologies for the aside, but is there a good online calculator anywhere which would let me play with some numbers to see the effect on my net take home of increasing pension contribtutions. I am in a position where I will be exposed to the 60% marginal rate for this tax year.

[B9]

https://www.thesalarycalculator.co.uk/

[martinbiz]

Another thing to throw into the mix is if the OP has children it's a double win for them, one of them on a 56K salary will see them lose more than half the chld benefit allowance, so all the more reason to get the gross down to under 50k

[romeogolf]

martinbiz said:

Another thing to throw into the mix is if the OP has children it's a double win for them, one of them on a 56K salary will see them lose more than half the chld benefit allowance, so all the more reason to get the gross down to under 50k

No children and no chance of them. It's pretty much the only benefit to being a great big bender and I plan to make the most of that one ;-)

Thanks all for the general advice. I think he'll need to talk to his employer about whether he can do salary sacrifice and still receive the benefit of their contributions to the scheme, as well as confirm exactly how much they're happy to contribute as we're not entirely sure.

[martinbiz]

romeogolf said:

No children and no chance of them. It's pretty much the only benefit to being a great big bender and I plan to make the most of that one ;-)

nice one, good luck

[TwigtheWonderkid]

romeogolf said:

No children and no chance of them. It's pretty much the only benefit to being a great big bender

I'm sure there are others. Toilet seat permanently up, no grief over buying a 1000cc sportsbike, football on tv all the time, etc. Sounds ideal, but unfortunately I'm cursed with heterosexuality.

[markiii]

romeogolf said:

No children and no chance of them. It's pretty much the only benefit to being a great big bender and I plan to make the most of that one ;-)

Thanks all for the general advice. I think he'll need to talk to his employer about whether he can do salary sacrifice and still receive the benefit of their contributions to the scheme, as well as confirm exactly how much they're happy to contribute as we're not entirely sure.

Even if they aren't, stick it in a shopand get the tax back year end