Hold off pension contributions until I reach higher rate tax bracket?

foncused

I hope to reach the higher rate tax bracket in a few years. Would I be better off putting my pension contributions into ISAs and other investment vehicles, then making a lump sum contribution upon reaching the higher rate income, thereby achieving 40% tax relief on current contributions?

bristol_pilot

Yes. Pensions are only worthwhile for 40% taxpayers, IMO. However your plan doesn't achieve a higher rate saving on CURRENT contributions, if you see what I mean. This assumes that what you propose does not involve foregoing an employer contribution.

jem16

foncused wrote: »

I hope to reach the higher rate tax bracket in a few years. Would I be better off putting my pension contributions into ISAs and other investment vehicles, then making a lump sum contribution upon reaching the higher rate income, thereby achieving 40% tax relief on current contributions?

You will only receive 40% tax relief on the amount that you are into the higher rate tax bracket not necessarily the whole contribution.

So if you were into the higher rate tax barcket by £1000 and made a lump sum contribution of £5000 you would only get tax relief at 40% for the £1000.

foncused

jem16 wrote: »

You will only receive 40% tax relief on the amount that you are into the higher rate tax bracket not necessarily the whole contribution.

So if you were into the higher rate tax bracket by £1000 and made a lump sum contribution of £5000 you would only get tax relief at 40% for the £1000.

How do employer contributions effect this?

bendix

Hold on a moment. Hasnt Darling recently announced plans to limit tax relief on contributions into a pension fund to 20% effective 2011? If so, there seems no point holding back and waiting.

Curiously, I haven't heard Cameron and Osbourne say what their policy on this is yet.

smerch1468

bendix wrote: »

Hold on a moment. Hasnt Darling recently announced plans to limit tax relief on contributions into a pension fund to 20% effective 2011? If so, there seems no point holding back and waiting.

Curiously, I haven't heard Cameron and Osbourne say what their policy on this is yet.

This only effects high earners, ie those on more than £150,000, and there are already rules in place that prevent these people throwing large amounts of cash into their pension fund pre 2011.

jem16

foncused wrote: »

How do employer contributions effect this?

It doesn't matter who makes the contributions - tax relief works in the same way.

bendix

smerch1468 wrote: »

This only effects high earners, ie those on more than £150,000, and there are already rules in place that prevent these people throwing large amounts of cash into their pension fund pre 2011.

Are you absolutely sure on that point, smerch? I thought it was the case that ALL contributions will be limited to just 20% from now on, and not just for high rate tax payers. If that's the case it seems very strange because how will that work in practice?

Someone earning, say, 60k a year will still receive 40% relief on contributions, but what about those on 160k a year? Does part of their pension contribution attract 40% relief, and then revert to only 20%.

What a ridiculous situation.

Has anyone seen any modelling?

jem16

bendix wrote: »

Are you absolutely sure on that point, smerch? I thought it was the case that ALL contributions will be limited to just 20% from now on, and not just for high rate tax payers.

Definitely for those earning more than £150k.

Someone earning, say, 60k a year will still receive 40% relief on contributions, but what about those on 160k a year? Does part of their pension contribution attract 40% relief, and then revert to only 20%.

It's tapered according to how much they earn. Plus with the new 50% tax band those earning between £150k and £160k will still benefit.

http://www.guardian.co.uk/money/2009/apr/28/pension-contributions-tax-relief

foncused

jem16 wrote: »

It doesn't matter who makes the contributions - tax relief works in the same way.

I'm still confused. If 40% tax kicks in at £40,000, and I earn £41,000, don't contribute anything to my pension, and my employer contributes £3,000, will I only be able to claim 40% relief on £1000?

jem16

foncused wrote: »

I'm still confused. If 40% tax kicks in at £40,000, and I earn £41,000, don't contribute anything to my pension, and my employer contributes £3,000, will I only be able to claim 40% relief on £1000?

Yes that's correct. You are only paying 40% tax on the £1,000 so you are only entitled to 40% tax relief on the £1,000.