Avoiding 40% tax rate

Pythagorous

Can anyone help me to clarify the limit at which I will be paying 40% tax for the 2012/13 tax year (I do my own self assessment).

My understanding is as follows:

- The tax free limit is £8,105 and the 20% tax band is £34,370, meaning taxable income above £42,475 will be taxed at 40%.

- I paid approx £3,700 into my employer's pension scheme as employee contributions as well as £2,916 in childcare vouchers.

The above means that I will pay 40% on anything I earned above £42,475+£3,700+£2,916 = £49,091 (ignoring other income e.g. from savings and property)

Is this right? Thanks!!

CTA_2

I don't work with income tax regularly so my knowledge is a bit hazy.

1) Pension, the relief would depend on whether you are paying into a group personal pension scheme or an occupational pension scheme. If paying into personal pension scheme, you are correct in thinking that it extends the basic rate band. If your employer deducts the pension contributions from your gross salary before you are taxed, then it will not increase your basic rate band.

2) Childcare vouchers, as i understand are under a salary sacrifice arrangement such that an employer deducts the cost of the vouchers from gross pay before applying tax such that you save on tax and NI. This wouldn't increase the BR band but there may be an arrangement where this happens which I am not up to date on.

Therefore, you have to provide a bit more confirmation on the pension situation before a more solid answer could be given.

Pythagorous

CTA wrote: »

I don't work with income tax regularly so my knowledge is a bit hazy.

1) Pension, the relief would depend on whether you are paying into a group personal pension scheme or an occupational pension scheme. If paying into personal pension scheme, you are correct in thinking that it extends the basic rate band. If your employer deducts the pension contributions from your gross salary before you are taxed, then it will not increase your basic rate band.

2) Childcare vouchers, as i understand are under a salary sacrifice arrangement such that an employer deducts the cost of the vouchers from gross pay before applying tax such that you save on tax and NI. This wouldn't increase the BR band but there may be an arrangement where this happens which I am not up to date on.

Therefore, you have to provide a bit more confirmation on the pension situation before a more solid answer could be given.

Thanks CTA. My employer's pension plan is the USS (Universities Superannuation Scheme) which I guess is an occupational scheme.

So just to check my understanding.....if I earned for example £50K gross over 2012/13 (from which I paid £3,700 into the USS pension scheme and £2,916 in childcare vouchers) then based on the above information I would end up paying 40% tax on £50,000-£42,475-£2,916? I.e. the childcare vouchers offset the amount to pay 40% tax on, but not my employer pension payments into the pension scheme?

jem16

Pythagorous wrote: »

Thanks CTA. My employer's pension plan is the USS (Universities Superannuation Scheme) which I guess is an occupational scheme.

It is and one where contributions are made from gross salary.

So just to check my understanding.....if I earned for example £50K gross over 2012/13 (from which I paid £3,700 into the USS pension scheme and £2,916 in childcare vouchers) then based on the above information I would end up paying 40% tax on £50,000-£42,475-£2,916? I.e. the childcare vouchers offset the amount to pay 40% tax on, but not my employer pension payments into the pension scheme?

The £3700 paid into your pension has the effect of reducing your taxable income so you have automatic 40% tax relief. If you look at your P60 you will see that the taxable income is the amount of your gross salary minus your pension payments. On your example of £50k gross and £3700 pension payements, you will only be taxed on £46,300.

I would assume your childcare vouchers are worked in the same way. So your taxable pay becomes £50k - £3700 - £2916 which equals £43,384. You are paying 40% tax on £909.

Pythagorous

jem16 wrote: »

It is and one where contributions are made from gross salary.



The £3700 paid into your pension has the effect of reducing your taxable income so you have automatic 40% tax relief. If you look at your P60 you will see that the taxable income is the amount of your gross salary minus your pension payments. On your example of £50k gross and £3700 pension payements, you will only be taxed on £46,300.

I would assume your childcare vouchers are worked in the same way. So your taxable pay becomes £50k - £3700 - £2916 which equals £43,384. You are paying 40% tax on £909.

Great. Thank you Jem. Really appreciate that. That's exactly what I thought, but wanted to check.

xylophone

Consider AVCs to bring taxable income wholly into standard rate tax ?
http://www.uss.co.uk/SchemeGuide/FinalSalaryBenefitssection/maximisingyourpension/Pages/default.aspx

Pythagorous

xylophone wrote: »

Consider AVCs to bring taxable income wholly into standard rate tax ?
http://www.uss.co.uk/SchemeGuide/FinalSalaryBenefitssection/maximisingyourpension/Pages/default.aspx

Thanks Xylophone. I have been looking at that option, which raises the question of whether its better going for the added years option or the money purchase option.

My thoughts are that the Added years option is generally a better option unless:

- you expect the money purchase investment returns to be greater than those assumed in the calculation of the cost of the added years (not sure what this is).
- You want more control over your AVC investment. E.g. controlling the level of risk via fund choice etc.
- You expect your future salary increases to be less than that assumed in the calculation of the cost of the added years (again not sure what this is).
- You want to increase the amount you take as tax free cash.

Just looking at the cost of the added years it seems the USS are very prudent in their assumptions (e.g. low investment returns), hence the added years do seem a very expensive option.

Any thoughts?

xylophone

Are you currently entitled to draw your pension at 60?

If so, is there any likelihood of a change to bring pension age into line with state pension age?

Are you likely to want to retire earlier with actuarial reduction?

Is your scheme going to change to career average?

(Compare LGPS)

Have you considered a SIPP rather than the AVC route?

bclark

jem16 wrote: »

It is and one where contributions are made from gross salary.



The £3700 paid into your pension has the effect of reducing your taxable income so you have automatic 40% tax relief. If you look at your P60 you will see that the taxable income is the amount of your gross salary minus your pension payments. On your example of £50k gross and £3700 pension payements, you will only be taxed on £46,300.

Just out of interest here my Gross pay and taxable pay are exactly the same for this year, what does that mean? Its my first full year in this job and I was only able to join the pension scheme a few months ago but according to my payslip I have contributed £550 but my gross pay and taxable pay are showing the same figure.

jem16

bclark wrote: »

Just out of interest here my Gross pay and taxable pay are exactly the same for this year, what does that mean? Its my first full year in this job and I was only able to join the pension scheme a few months ago but according to my payslip I have contributed £550 but my gross pay and taxable pay are showing the same figure.

It means that you have a pension scheme where the contributions come out of net salary and not gross salary. Your pension provider adds on the tax relief.

kidmugsy

Ever since the rules changed to let people in an occupational scheme also have a personal pension, AVCs have looked a bit redundant - except for the cases where they let you take all the AVC as lump sum and therefore go for maximum monthly pension from the main scheme. It would be well worth checking whether that's the case with the USS/Pru combination. But the cost to you includes having your AVC locked in until scheme retirement age.