work and pesion tax

redjonmac

Hello,

This is my first post, so please bear with me.

I have a question. I am about to leave the RAF after 22 years. This entitles me to an immediate pension of £8766 pa. I will be starting a new job as soon as I leave. This job pays £43k pa. The question I have I suppose is:- Am I better off paying 40% tax on my pension, or using my pension as my first income and paying 40% tax on the amount of my working pay that comes in above the 40% barrier?

To me, the situation sounds complicated, as I don't pay national insurance on my RAF pension, and will be joining my company pension scheme. This allows me to sacrifice up to 5% of my income, and the company will add a further 10% to the pot. So this is a no brainer, or at least I think it is.

Can someone help me here?

Many thanks,

Jon

redjonmac

apologies for that, it appears that it wasn't my first post, although I don't remember posting before. Also, my spelling of pension is incorrect. Sorry

jem16

redjonmac wrote: »

Am I better off paying 40% tax on my pension, or using my pension as my first income and paying 40% tax on the amount of my working pay that comes in above the 40% barrier?

It won't make any difference as to the amount of tax in the lon run. However a 2nd job is usually given a BR(20%) code or DO(40%) code. If you apply the DO code to your pension it will be about right, although with you paying 5% of your salary into a pension scheme it will probably be a bit too much. However BR would be too little.

Put the DO code onto your salary though and you would pay way too much and then have to claim it back later.

Personally I would have the main tax code on your salary and DO on the pension.

To me, the situation sounds complicated, as I don't pay national insurance on my RAF pension, and will be joining my company pension scheme. This allows me to sacrifice up to 5% of my income, and the company will add a further 10% to the pot. So this is a no brainer, or at least I think it is.

Can someone help me here?

Many thanks,

Jon

As a higher rate taxpayer and employer contributions, it certainly is a no brainer to join the pension scheme.

Bigmoney2

OK I'm not an expert but don't think it will make any difference which way round you do it, but think HMRC will decide anyway. I would assume that your personal allowance (tax) of 7475 will be offset against your pension so will pay 20% tax on the amount above that.
For the salary you will pay tax at basic rate (as personnal allowance already used up), so 20% on most then 40% on anything over the threashold (not sure of the exact figure) this includes your pension amount as well. NI will be payable on salary.

HTH

redjonmac

Many thanks to you both for your help.

So, if I've got this right, there won't really be any difference which way around I (or they) do it? Even if I put 5% into a pension, and buy childcare vouchers for my 2 kids?

jem16

redjonmac wrote: »

Many thanks to you both for your help.

So, if I've got this right, there won't really be any difference which way around I (or they) do it?

In the end, no as you will be able to claim for a rebate if you have paid too much tax.

However there will be a big difference to your take home pay at the time depending on which way you do it.

Tax code on pension and BR on salary would see too little tax being taken. Tax code on pension and DO code on salary would see way too much tax being taken.

Tax code on salary and BR on pension would see too little tax being taken. Tax code on salary and DO on pension would see too much tax taken off but would not be so bad as it was if the codes were the other way round.

As I said earlier to have the tax code on your work will be better for you.

It is also possible that HMRC could adjust the tax code so that more tax is taken off the salary and BR attached to the pension. That would be even better.

ceeforcat

Bigmoney your solution would result in an underpayment - BR does not collect Higher rate tax due.

Surely what would happen if the pension was 7475 per annum would be that a code of 0T would be applied to the earnings, ensuring basic rate band fully utilsed. In this case, however, this would leave the poster underpaid £258 in the tax year and the code would be adjusted to collect this - the end result would be a K code of K129 approx against the earnings?

Am I wrong?

zygurat789

Would the pension increase if you took it later?

redjonmac

The pension would increase if I took it later, but to do that, I would have to stay in the RAF, which I no longer want to do. Also, as the Armed Forces are part of the Public Sector, I fear my pension will be taken away from me in 2015 (if I stay in the RAF).

If I leave and take my pension now, it's not index linked until (if) I get to 55 years old.

I could take a slightly larger pension now, of approx £10,500 pa. and a smaller lump sum. But I think I will be better off taking the larger (tax free) lump sum now, and the lower yearly pension, as I am going to be paying 40% tax on it.

jem16

redjonmac wrote: »

Also, as the Armed Forces are part of the Public Sector, I fear my pension will be taken away from me in 2015 (if I stay in the RAF).

That's not going to happen. If the scheme changes to career average, all your final salary benefits will be preserved.

redjonmac

They are saying there is a chance we won't get our pension until we're 60, instead of from the day we leave, which for me is aged 40. So although my pension will still be there, I will miss out on 20 years of payments.