Pros and cons of being a higher-rate tax payer

onlyroz

vacheron wrote: »

As you are on salary sacrifice you do not need to worry about recovering your pension tax relief as a higher rate taxpayer paying pension contributions after tax would have to, so at least that makes things easier!

But does the tax relief end up in my pension, or in my take-home pay?

Doshwaster

sunshinetours wrote: »

LOL indeed!

The mechanics are different in that both will pay an amount into a pension net of basic rate and this gets topped up by the tax amount in your actual pension fund.
If you are a higher rate payer you then claim higher rate relief either when you do your self assessment or via your tax coding.

Either way a very real benefit in cash terms!

It's amazing how many higher rate tax payers don't know about this. Even if you don't do a a tax return all you have to do is write to HMRC telling them how much you pay into a pension and you can get hundreds of pounds back.

There's a template letter here: http://www.hl.co.uk/__data/assets/pdf_file/0008/5822684/Guide-to-Claiming-Higher-Rate-Tax-Relief.pdf

jem16

onlyroz wrote: »

But does the tax relief end up in my pension, or in my take-home pay?

There is no simple answer to that as it depends on the type of pension that you have.

If you have a pension where the contributions are made from gross pay then making a £100 contribution will reduce your taxable pay and thus cost you £60 from your net pay.

If contributions are made from your net pay, you would need to pay in £80 and the pension provider would add £20 making it £100. The other £20 would come from HMRC in the form of a rebate or via an increased tax code. The result would still be £100 in the pension and it would still cost £60 from your net pay.

Where the problem arises is if someone paying from net pay only pays £60 and thinks this will give them £100 in the pension. The £60 would then be increased by basic rate tax relief to £75 with a further £15 being rebated by HMRC. Net cost is £45.

However another thing you have to remember is that you only get higher rate tax relief on the amount of pension contributions that you actually pay higher rate tax on and not the whole lot.

So for example if you were £1k into higher rate tax and paid £4k in pension contributions, you would only get higher rate tax relief on £1k with the other £3k being basic rate tax relief. You would not get higher rate tax relief on the whole £4k.

onlyroz

I think I get it now. In any case I make my pension contributions as a percentage, and they come out of my gross pay. So I pay a 5% contribution and my company adds another 3% on top of this. It is also done by salary sacrifice and so we make NI savings (and I think the company gives us back half of the NI savings that they make as well). I got a letter recently which said that this works out as an 8.34% pension.

YoungBusinessman

A pro is you earn more than your average Joe. A con is your average Joe gets jealous...this is what i found when i became a HR tax payer at 20 years old.

sunshinetours

YoungBusinessman wrote: »

A pro is you earn more than your average Joe. A con is your average Joe gets jealous...this is what i found when i became a HR tax payer at 20 years old.

Only when forced down their throats, My family knows how much I earn and that's it - maybe learn some discretion?

YoungBusinessman

Sometimes it's common knowledge your job is a HR tax payers amount

kidmugsy

1) Increase the amount you put into your pension by sal sac so that you remain a 20% taxpayer.
2) Get your savings into Cash ISAs anyway.
3) That's all.

zagfles

Nobody's mentioned gift aid (or did I miss it), if you pay higher rate tax you can get 25% of all your gift aid contributions back, so make a note of them and declare them.