tax relief on pension contributions for higher earners
Indigo05
Posts: 9 Forumite
Hi MSE experts,
One of my hard working friend (7 day a week worker) was enquiring re how she can save taxes as her income is above 150k ( 3 jobs in NHS) and she is paid 44k into pension (GP practitioner NHS pension-employee + employer). She is worried re 'scheme payes' penalty as well; due to recent April 2016 rules re reduction in tax relief on pension contributions for higher earners.
I suggested paying into venture capitals, EIS etc.
Other option one of her friend suggested was to have NHS pension breaks once every few months/years to reduce 'scheme pays' liability. Is it legal?
Her FA suggested to continue paying into NHS pension as it's the best!
She is aware of her moral obligations to pay more taxes but was wishing to get more information in case she is missing out of any legal ways to minimise tax. She is not wishing to avoid any taxes.
I'm sorry for long post but wanted to give as much information available so that she can get best advice.
thanks
One of my hard working friend (7 day a week worker) was enquiring re how she can save taxes as her income is above 150k ( 3 jobs in NHS) and she is paid 44k into pension (GP practitioner NHS pension-employee + employer). She is worried re 'scheme payes' penalty as well; due to recent April 2016 rules re reduction in tax relief on pension contributions for higher earners.
I suggested paying into venture capitals, EIS etc.
Other option one of her friend suggested was to have NHS pension breaks once every few months/years to reduce 'scheme pays' liability. Is it legal?
Her FA suggested to continue paying into NHS pension as it's the best!
She is aware of her moral obligations to pay more taxes but was wishing to get more information in case she is missing out of any legal ways to minimise tax. She is not wishing to avoid any taxes.
I'm sorry for long post but wanted to give as much information available so that she can get best advice.
thanks
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Comments
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Other option one of her friend suggested was to have NHS pension breaks once every few months/years to reduce 'scheme pays' liability. Is it legal?
What would that achieve?Her FA suggested to continue paying into NHS pension as it's the best!
Even with the tapering, I would expect £ for £ spent would mean the NHS pension trumps all other options by a long way. Maybe her friend that told her to opt out periodically could provide her with the calculations behind her thinking.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0 -
Thanks for quick reply.
I'll try and answer.
Not sure! Will check with her!What would that achieve?
I'm not too sure. She mentioned that over 40k of pension there is tax from NHS pension scheme?!
Even with the tapering, I would expect £ for £ spent would mean the NHS pension trumps all other options by a long way. Maybe her friend that told her to opt out periodically could provide her with the calculations behind her thinking.0 -
Discussed with her to try and get more information. She is lot confused with advice from peers.
I think NHS pension break suggested was to have tax relief for ?? upcoming years.
Sorry if it doesn't make sense but I gather she is given ill advice by friends who are not financial advisors???
Can anyone make it simple for her? Many thanks in advance0 -
The NHS has two benefits. Tax relief on contributions being one and the other being generous retirement benefits covered by the taxpayer that only cost the employee (her) a very small amount.
With her income, the annual allowance is tapered down but it is not fully lost. It is between £150k and £210k income where it is reduced. If the "adjusted income" is over £210k then her annual allowance will be £10k and could see a lot of tax relief lost. However, even with that tax relief lost, the benefits of the NHS pension means she is still going to get back far more than £1 for ever £1 it costs her.
It is estimated that the cost of replacing the NHS pension is around 25%-30% of your salary (i.e if you were trying to match the NHS scheme with alternatives) She is paying 14.5% before tax relief. So, even if there was no tax relief, it is still a big benefit.
We really need to know what she is earning. However, on £160k, that makes her 14.5% contribution £23,200. Even the worst case scenario that her "adjusted income" takes her through £210k (which is quite likely when calculating the adjusted income) then the annual allowance going down to £10k, that means £10,000 of her contribution still gets tax relief. The other £13,200 does not.
it is still damned good value for money. Just not as much as it was.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0 -
Not wanting to hijack this thread, but in a PP or SIPP, if you are a higher rate taxpayer, you get basic relief at source, but then need to claim the additional higher rate relief.
Does this happen with the current (GP) NHS pension, or is it effectively salary sacrifice?0 -
Discussed with her to try and get more information. She is lot confused with advice from peers.
I think NHS pension break suggested was to have tax relief for ?? upcoming years.
Sorry if it doesn't make sense but I gather she is given ill advice by friends who are not financial advisors???
Can anyone make it simple for her? Many thanks in advance
Given the sums involved it's probably worth her speaking to an IFA, even after the fee the savings could be considerable.0 -
Not wanting to hijack this thread, but in a PP or SIPP, if you are a higher rate taxpayer, you get basic relief at source, but then need to claim the additional higher rate relief.
Does this happen with the current (GP) NHS pension, or is it effectively salary sacrifice?
The tax relief you describe is whar happens with a private contribution from taxed income. With a large employer it is usual for the pension to be deducted from the gross income and then the tax calculated so you are never charged tax on the pension and are therefore not due a refund.0 -
Thanks Linton, thought that might be the case, but couldn't find a link0
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Thanks a lot. I gather her earnings are somewhere around 170-190k
She says these vary yearly depending upon type of work she does and her sick/annual leave etc (self employed) and doing 3 jobs.
Is it not worth investing in EIS , Venture capitals etc to reduce tax breaks (30%)?
Thanks again for your valuable adviceThe NHS has two benefits. Tax relief on contributions being one and the other being generous retirement benefits covered by the taxpayer that only cost the employee (her) a very small amount.
With her income, the annual allowance is tapered down but it is not fully lost. It is between £150k and £210k income where it is reduced. If the "adjusted income" is over £210k then her annual allowance will be £10k and could see a lot of tax relief lost. However, even with that tax relief lost, the benefits of the NHS pension means she is still going to get back far more than £1 for ever £1 it costs her.
It is estimated that the cost of replacing the NHS pension is around 25%-30% of your salary (i.e if you were trying to match the NHS scheme with alternatives) She is paying 14.5% before tax relief. So, even if there was no tax relief, it is still a big benefit.
We really need to know what she is earning. However, on £160k, that makes her 14.5% contribution £23,200. Even the worst case scenario that her "adjusted income" takes her through £210k (which is quite likely when calculating the adjusted income) then the annual allowance going down to £10k, that means £10,000 of her contribution still gets tax relief. The other £13,200 does not.
it is still damned good value for money. Just not as much as it was.0 -
Is it not worth investing in EIS , Venture capitals etc to reduce tax breaks (30%)?
If she accepts the risks and tie ins then they are viable options. It is important to not let tax be the primary driver. However, if they her fit objectives then fair enough.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0
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