Higher rate tax -pension v car

wobblegobble

Hi there. Currently on the limit of paying higher rate tax and with (hopeful) pay increase next year will probably move into 40% tax bracket. I contribute to a pension and also have a company car.

Question is should I increase pension contributions to remain basic rate taxpayer and therefore avoid paying 40% tax on car (and potentially losing child benefit in future) or move into higher band and pay 40% tax and claim 40% relief on pension contributions?

I am assuming if the pension relief is higher than the increase in car tax then moving to 40% tax is the thing to do? Doesn't seem right that being a higher rate tax payer is financially beneficial?

jem16

wobblegobble wrote: »

Question is should I increase pension contributions to remain basic rate taxpayer and therefore avoid paying 40% tax on car (and potentially losing child benefit in future) or move into higher band and pay 40% tax and claim 40% relief on pension contributions?

Both have the same effect.

wobblegobble

jem16 wrote: »

Both have the same effect.

Sorry to be thick but how?

As I understand it my current monthly company car tax of circa £60 will double to £120 but my tax relief of circa £100 on the pension will double to £200? So I am £80 better off? (Ignoring the 20% extra tax on the small amount I earn over the higher threshold)

jem16

wobblegobble wrote: »

Sorry to be thick but how?

Claiming 40% tax relief on pension contributions has the effect of increasing your 20% band.

So depending on how you pay your pension contributions it will be one of two methods.

1. Paid from gross salary before tax. This reduces your taxable income so that you never actually pay higher rate tax. ( although technically you are still a higher rate taxpayer )

2. Paid from net salary after higher rate tax has been deducted. You pay a net amount into the pension and the pension provider increases it to the gross payment. So a net payment of £80 becomes £100 with tax relief of £20. You then claim the extra 20% ( £20) from HMRC via your tax return or via a code change - this has the effect of increasing your 20% tax band.

In both cases you are technically a higher rate taxpayer who doesn't pay higher rate tax.

wobblegobble

Thanks for reply but still think we're at cross purposes. I am trying to establish whether the 20% extra relief on pension contributions is more beneficial than the amount my company car tax will increase by.

The pension relief I get and the car tax I pay are different amounts.

CLAPTON

the maths is like this

salary
plus benefits e.g. car, heath insurance
less gross pension contributions

equals taxable pay
if this is greater than 42,475 then you pay 40% tax otherwise you don't



it's just that simple
exactly how it is presented may differ

jem16

wobblegobble wrote: »

Thanks for reply but still think we're at cross purposes. I am trying to establish whether the 20% extra relief on pension contributions is more beneficial than the amount my company car tax will increase by.

I gathered that.

Basically you will only get higher rate tax relief on the part of the pension payment that is above the higher rate tax threshold. So you need to move into the higher rate tax band to get that relief. That has the same effect as moving you back into basic rate tax. So your initial question didn't make a lot of sense.

However your car benefit might move you back into higher rate tax.

It's all down to figures.

wobblegobble

CLAPTON wrote: »

the maths is like this

salary
plus benefits e.g. car, heath insurance
less gross pension contributions

equals taxable pay
if this is greater than 42,475 then you pay 40% tax otherwise you don't



it's just that simple
exactly how it is presented may differ

Thanks. Salary plus car benefit@ 20% less pension is currently just shy of 42,475.

If I get a payrise next year I move above 42,475. I am assuming the car benefit will then double and be taxed at 40% but I will also gain 40% relief on the pension contributions.

Pension relief @40% will be greater than car tax @40% so it seems moving into 40% tax is beneficial to me?

I was thinking of increasing pension contributions to remain a basic rate taxpayer but it seems it might be worth my while to move into 40% bracket to gain from the extra pension relief.....

jem16

wobblegobble wrote: »

Pension relief @40% will be greater than car tax @40% so it seems moving into 40% tax is beneficial to me?

It all depends on the figures. For example if you paid £2000 gross into your pension but you were only a higher rate taxpayer by £500, you would only get 40% tax relief on the £500 and not the whole £2000.

I was thinking of increasing pension contributions to remain a basic rate taxpayer but it seems it might be worth my while to move into 40% bracket to gain from the extra pension relief.....

Could you explain that with figures please?

wobblegobble

Thanks you've answered the question. I was missing the bit about only getting relief for the portion above the 40% threshold. I was under the impression you got relief for the full £2000 (using your example)

jem16

wobblegobble wrote: »

Thanks you've answered the question. I was missing the bit about only getting relief for the portion above the 40% threshold. I was under the impression you got relief for the full £2000 (using your example)

Yes I wondered if that is what you were thinking. I did tell you that in an earlier post but you must have missed it.