How much to pay into my pension to avoid 40% tax

diveleader

Hi All,
Could someone kindly let me know how much I should add to my pension pot to avoid getting hit with HR tax for 2012-13.

The figures are like this:
PAYE income 7488
BIK (co. car) 1530 (this is the cash equivalent amount)
Net dividend income 34625

no tax paid via paye.

I am looking to keep out of the 40% tax rate and would therefore appreciate you thoughts on how much to pay into my pension before the end of the tax year.

Thanks

jem16

diveleader wrote: »

Hi All,
Could someone kindly let me know how much I should add to my pension pot to avoid getting hit with HR tax for 2012-13.

The figures are like this:
PAYE income 7488
BIK (co. car) 1530 (this is the cash equivalent amount)
Net dividend income 34625

no tax paid via paye.

I am looking to keep out of the 40% tax rate and would therefore appreciate you thoughts on how much to pay into my pension before the end of the tax year.

Thanks

So dividend income plus 10% tax credit would be £38,472.22 plus your earned income plus the BIK would give a total of £47,490.22.

Take off the personal allowance of £8105 and the higher tax starting band of £34,370 and you are left with £5015.22.

So a gross pension payment of £5015.22, net payment of £4012.18 should cover it.

diveleader

Thanks Jem

mania112

Perhaps i'm over-egging the pudding but:

You don't pay tax on contributions, you're given relief. You don't need to 'avoid' 40%.

Secondly, Dividends don't count as earned income for pension contributions - so your max is only £7,488 (and then I wonder what 'didn't pay tax on PAYE' means and how that's affected.

zagfles

mania112 wrote: »

Perhaps i'm over-egging the pudding but:

You don't pay tax on contributions, you're given relief. You don't need to 'avoid' 40%.

Secondly, Dividends don't count as earned income for pension contributions - so your max is only £7,488 (and then I wonder what 'didn't pay tax on PAYE' means and how that's affected.

It's within the personal allowance so that's presumably why no tax was paid. But good point about the max, only earned income counts.

jem16

mania112 wrote: »

Perhaps i'm over-egging the pudding but:

You don't pay tax on contributions, you're given relief. You don't need to 'avoid' 40%.

Yes and the 40% tax relief that he will get on his pension contribution will negate the 40% tax that he has to pay on his total income. However what I'm unsure of is the order in which the income sources are dealt with and it might make a difference.

Secondly, Dividends don't count as earned income for pension contributions - so your max is only £7,488 (and then I wonder what 'didn't pay tax on PAYE' means and how that's affected.

He only needs to make a £5015 contribution so he's below that limit. He probably needs less because his income is mainly dividends and he will get the benefit of the 10% tax credit.

guitarman001

What if you're on, say, a £50k salary? In 2013-24 when you add the 40% band to the personal allowance, it comes to £41450 before you start paying 40% on savings interest. So you'd need to put in >12%+ of salary a month to pension?

jem16

guitarman001 wrote: »

What if you're on, say, a £50k salary? In 2013-24 when you add the 40% band to the personal allowance, it comes to £41450 before you start paying 40% on savings interest. So you'd need to put in >12%+ of salary a month to pension?

Depends on whether your pension contributions come from gross or net salary. Basically you need to make a £8550 gross contribution.