Pension tax relief on large % of income and PAYE

squeeks

Hi,

Slightly daft hypothetical situation regarding pension tax relief.

I am playing around with the tax calculator found here: http://www.uktaxcalculators.co.uk/

If you dropped in a salary of 30k, and pension contribution of 23k you end up with a zero 20% tax liability and £4.4k take home (+4.6k extra in the pension).

How would you go about actually doing that in practice if you are in regular PAYE employment, given that you are reliant on the tax rebate to make part of that payment, and to actually have any take home pay given that PAYE takes the money before you get your grubby hands on it, and tax returns are only done annually?

I think you can make up to 100% of your income as a pension contribution up to 50k, so it should be possible, I've just no idea how it works in practice.

Currently I am on PAYE, I tell HR I want to have X percent as a contribution and it all goes off to the company pension scheme and the tax is all worked out. I am not entirely sure how I would get tax relief on a second pension with a different provide either.

jamesd

You can make additional pension contributions to a personal pension or to a work pension scheme that is not using salary sacrifice. In this case you'd tell HMRC in a letter or by phone and ask them to adjust your tax code for the year so that you don't pay too much tax.

If doing it only with salary sacrifice that would be unnecessary because the contributions would come from your pre-tax pay. Work pension deductions from after-tax pay are not salary sacrifice, only pre-tax is. You can't use salary sacrifice to take your income below minimum wage - your employer would be breaking the law by paying you too little if they let you do that.

So first thing to do is find out whether the work pension scheme is salary sacrifice or not.

Remember to apply for Working Tax Credits due to the lower post-pension income. Yes, you really can get tax credits. As a single person it can be worth a few thousand to you, potentially much more if you have children. If you have any reservations at all whether this is possible just phone the WTC helpline and they will confirm it to you.

You can also do things like using a 0% for purchases credit card or two for as much normal spending as possible.

squeeks

**You appear to still be liable for NI contributions so you are still being paid 30k, and your contract for employment would still be 30k so I'm not sure that minimum wage is an issue

**[Edit] Sorry I see, yes if salary sacrifice, as yes, it would bring your income down (and NI liability), but not if the pension was after tax

http://www.hmrc.gov.uk/incometax/relief-pension.htm
...
Limits on tax relief
You can save as much as you like into any number and type of registered pension schemes and get tax relief on contributions of up to 100 per cent of your earnings (salary and other earned income) each year, provided you paid the contribution before age 75. But the amount you save each year toward a pension from which you benefit from tax relief is subject to an 'annual allowance'. The annual allowance amounts for the current and previous two tax years are shown below.
...

With the above, the 100% earnings would only apply to people except from minimum wage such as company directors, people living of investments and self employed.

I believe my current pension is salary sacrifice, but if I was to do anything quite as nutty as this, I would want a SIPP I think, so it would be a separate pension scheme.

Would you apply for tax credits and give your taxable income - so net after pension then? .. humm, I may have filled out my working/child tax credits out wrong for the last year in that case.

CLAPTON

if you want to contribute extra money to a pension, you receive the tax relief like this:

you pay money to a private pension company and they reclaim the tax at 20% for you from HMRC

so if you sent them a cheque for 23,000 then they would automatically reclaim 5,870 from the HMRC and so you would have 25,870 in your pension fund

or if you wanted a gross amount of 23,000 paid into your private pension fund then you would send them a cheque for 23,000 x 80% = 18,400 and they would claim 4,600 from HMRC


is that what you are asking?

squeeks

CLAPTON wrote: »

if you want to contribute extra money to a pension, you receive the tax relief like this:

you pay money to a private pension company and they reclaim the tax at 20% for you from HMRC

so if you sent them a cheque for 23,000 then they would automatically reclaim 5,870 from the HMRC and so you would have 25,870 in your pension fund

or if you wanted a gross amount of 23,000 paid into your private pension fund then you would send them a cheque for 23,000 x 80% = 18,400 and they would claim 4,600 from HMRC


is that what you are asking?

The problem was that you don't actually have 23k to physically pay into a pension fund after you have been paid and had 20% tax and NI taken off (its 22.9k...) without getting your TAX code changed before hand - hence the question of how do you do it from a practical point of view

CLAPTON

you pay in 18,400 which the pension company claims the 20% tax so your pension fund now has 23,000 in it.

squeeks

CLAPTON wrote: »

you pay in 18,400 which the pension company claims the 20% tax so your pension fund now has 23,000 in it.

But I want to have an effective 0% tax liability.

Is the calculator linked correct with 23k pension contribution and 30k income?

It seems to indicate:
2.6k NI
23k Pension
4.6k tax relief on 23k contribution
4.3k Net pay...

I seem to end up with more than I started with. once you include the tax relief.

squeeks

jamesd wrote: »

If doing it only with salary sacrifice that would be unnecessary because the contributions would come from your pre-tax pay. Work pension deductions from after-tax pay are not salary sacrifice, only pre-tax is. You can't use salary sacrifice to take your income below minimum wage - your employer would be breaking the law by paying you too little if they let you do that.

You can make additional pension contributions to a personal pension or to a work pension scheme that is not using salary sacrifice. In this case you'd tell HMRC in a letter or by phone and ask them to adjust your tax code for the year so that you don't pay too much tax.

So first thing to do is find out whether the work pension scheme is salary sacrifice or not.

Remember to apply for Working Tax Credits due to the lower post-pension income. Yes, you really can get tax credits. As a single person it can be worth a few thousand to you, potentially much more if you have children. If you have any reservations at all whether this is possible just phone the WTC helpline and they will confirm it to you.

You can also do things like using a 0% for purchases credit card or two for as much normal spending as possible.

Looking at my personal situation, it appears I used to be salary sacrifice, but changed a while ago to standard after tax set up, when the schemes changed.

Thanks for the heads up on the WTC, I had missed that one completely.

This could be interesting trying to get into a 0 tax (except NI) liability position.

noh

squeeks wrote: »

But I want to have an effective 0% tax liability.

Is the calculator linked correct with 23k pension contribution and 30k income?

It seems to indicate:
2.6k NI
23k Pension
4.6k tax relief on 23k contribution
4.3k Net pay...

I seem to end up with more than I started with. once you include the tax relief.

The 23K pension contribution includes the 4.6k tax relief.

squeeks

If I enter my actual income and current pension contributions which I do get tax relief on the contribution value appears to be exactly that, the value you contribute. The Tax relief value shown is the amount the tax man gives you as a top up.

Quite happy to accept the tool is broken in this scenario, but that doesn't seem to be the answer noh.

jamesd

squeeks wrote: »

if I was to do anything quite as nutty as this, I would want a SIPP I think, so it would be a separate pension scheme.

Your work scheme may allow full or partial transfers out, mine does provided I leave £5,000 in it.

If yours was still a salary sacrifice scheme it would ahve been worth finding out what part of the employer NI, if any, is added during salary sacrifice, common values are none, half or all of it.

squeeks wrote: »

**You appear to still be liable for NI contributions so you are still being paid 30k, and your contract for employment would still be 30k so I'm not sure that minimum wage is an issue

**[Edit] Sorry I see, yes if salary sacrifice, as yes, it would bring your income down (and NI liability), but not if the pension was after tax

Right.

squeeks wrote: »

Would you apply for tax credits and give your taxable income - so net after pension then? .. humm, I may have filled out my working/child tax credits out wrong for the last year in that case.

Yes, it's taxable income and you're supposed to deduct pension contributions including the tax relief on them. Eligible payments to charities can also be deducted. If salary sacrifice your income starts out as the income after sacrifice and you deduce any additional contributions from net pay if you make any of those.

squeeks wrote: »

This could be interesting trying to get into a 0 tax (except NI) liability position.

If they are an appropriate investment for you, Venture Capital Trusts can be useful for that when it comes to eliminating your basic rate tax liability. You get 30% tax relief up to the actual tax you paid in the year. That's higher than the 20% basic rate tax so you can eliminate all basic rate tax and still keep more income than just your income tax personal allowance. VCT income is tax free and any capital gains are if the VCT is held for at least five years.