Pension contributions /

Tesco_Tom

With a pay rise and the change to personal allowances fro 2011/12, I am in the fortunate (or unfortunate) position of potentially starting to pay higher rate tax.

I am currently in a generous company pension scheme, were they double my contributions up to a fixed percentage (5% from me,10% from company). In order to stay below the 40% tax bracket I would need to increase my contributions beyond the current 5% cap.

I also have a fairly small SIPP (~£20k) from previous company schemes, however I no longer make any regular payments to this.

What is the best way to deal with this to maximise my pension and reduce my tax. Is it best to make additional contributions to company scheme or SIPP? How do I reclaim the extra tax relief on the portion which would be subject to higher tax?

bilbo51

Do they currently deduct your 5% pension contribution from your gross salary before they do the tax calculation?

Shimrod

Tesco_Tom wrote: »

What is the best way to deal with this to maximise my pension and reduce my tax. Is it best to make additional contributions to company scheme or SIPP? How do I reclaim the extra tax relief on the portion which would be subject to higher tax?

You'll get the same tax relief either way - paying extra into the company pension scheme might be easier from an admin point of view as it is likely they will manage the reclaiming of the tax relief.

As to which way is best to maximise your pension, that relates more to the charges in both schemes, your attitude to risk and the funds available to invest in. I would imagine the SIPP offers a greater range of funds as well as the opportunity to invest in individual shares. How much effort are you prepared to put into managing your pension?

Tesco_Tom

bilbo51 wrote: »

Do they currently deduct your 5% pension contribution from your gross salary before they do the tax calculation?

Yes, but its not a straight forward set-up.

My contribution is actually 5% of 'pensionalbe pay' where pensionable pay = Gross salary - (1.5 x LEL). Company contribution is then based on 2 x (my contribution + reclaimed tax)

Thanks

Tesco_Tom

Shimrod wrote: »

You'll get the same tax relief either way - paying extra into the company pension scheme might be easier from an admin point of view as it is likely they will manage the reclaiming of the tax relief.

As to which way is best to maximise your pension, that relates more to the charges in both schemes, your attitude to risk and the funds available to invest in. I would imagine the SIPP offers a greater range of funds as well as the opportunity to invest in individual shares. How much effort are you prepared to put into managing your pension?

I am quite happy to do research and put in effort to improve returns and with almost 30 years to retirement I am quite happy to follow a reasonably high risk profile.

CLAPTON

a bit unclear

if you increased your pension to 6% say would your employer pay in 12 % or only 10% ?
is the pension money deducted at source before income tax is calculated?

Loughton_Monkey

I think the main thing to understand is that as you approach 40% tax, it is extremely cost effective to put in as much extra as you need to 'just' avoid the higher rate. Do this for as long as possible. £60 spent is £100 invested. £25 is yours tax free, and only 20% tax to pay on the £75 (so £60 net). All plus fund growth of course.

This approach, of course, also helps to avoid the 'sin' of 'living up to your income' and I can assure you that you won't regret it.

As to where to put it, have a look at what type of funds you want, and then go with those where you can find the best (lowest) charges. These days, there is no particular 'penalty' for building up pension pots with more than one provider.

Tesco_Tom

CLAPTON wrote: »

a bit unclear

if you increased your pension to 6% say would your employer pay in 12 % or only 10% ?

No, I can contribute as much as I want but employers contribution is capped at 10%

CLAPTON wrote: »

is the pension money deducted at source before income tax is calculated?

Yes, deducted at source

CLAPTON

40% tax is due on income in excess of 42,475 plus gross pension contributions

if you pay more into the company scheme and it is deducted before tax then you automatically get the 40% tax relief without doing anything.

if you pay into a private scheme then the scheme will reclaim 20% tax and will add it to your pension pot and you will need to claim the other 20% directly from HMRC

bilbo51

CLAPTON wrote: »

...and you will need to claim the other 20% directly from HMRC

via your tax return.

jem16

bilbo51 wrote: »

via your tax return.

Not necessarily.

The extra can be coded out by phoning HMRC.