Pension tax relief on large % of income and PAYE

CLAPTON

lets work out the situation for this tax year

on 30,000 gross income

tax:
allowance 8,105
so tax is 20% of 21,895 = 4,379

NI
allowance 7584
so NI 12% of 22,416 = 2,689

so total deduction is 7,069

take home pay = 22,931


Now if you wish to avoid taxing any tax you need to avoid paying 4,379
so you need to make a gross pension contribution of

4,379/20% = 21,895 gross if it were deducted BEFORE tax like a occupational company pension
but if you pay for a private pension you pay 21,895 x 80% = 17,516 from after tax income

so you now have only 5,415 to spend

squeeks

Thanks for that, it all sounds good. I was just thinking through how feasible it is to actually have a 0 tax liability, after all why give money away if you don't have to.

I may have to give this a try for a year at some point, preferably before I'm 35 and give the pension a good sound positive boost. Also could be a useful budgeting exercise, far to easy to get used to a certain standard of living, but at those kind of levels I'm going to be quite reliant on savings and/or tax credits just for basics, unless I could get free accommodation, and I certainly won't be mortgage free... The net income only gets worse as you increase the wage due to the NI liabilities as well, humm...

VCT are probably a little too high risk for me. I am only just starting to dabble in a S&S isa, so I probably have loads to loose before I remotely have a clue at what I am doing.

jamesd

It's entirely feasible to get to 0% income tax. Using salary sacrifice I went down to minimum age in 2008 but couldn't stay there because of a car allowance. Add some extra pension or VCT use and you're there.

I don't recommend it if you're younger than 35 though. What happens if you become longer term unemployed or unable to work? You can't touch the pension money but you can touch ISA money. If you want to be able to live long term at above benefit levels you need a lot of non-pension income from investments available. As you get closer to age 55 and the ability to take pension income the amount of non-pension money you'd need decreases and that makes it possible to switch money into pensions while still meeting an income target.

squeeks

Having savings and being unemployed has its own delights as I understand it, unless you tie the savings into a physical investment, such as a house or random objects. - I don't think the state takes possession into account when means testing things.

I am not sure I could build up enough saving that could actually be self sustaining above levels that would allow me to live. So no state support would be available and the capital would just disappear over time should I become indefinitely unemployed.

jamesd

Right, for non-pension money means testing is a problem if you end up on means tested benefits. Money in equity in a property doesn't count. The money would indeed just be spent on living expenses until you were able to get to the point where you had enough that you could sustain yourself without benefits. It is perhaps worth checking the value of benefits you'd be entitled to and working out what it would take to replace them, as a possible minimum target. Divide by say 0.05 to get the amount of capital required.