Increasing pension contributions to avoid 40% tax.

PParka

Hi,

My current salary means that I pay a some tax at 40%
I'm thinking of increasing my pension contributions to avoid paying any tax at 40%.

I currently pay 6% into my pension and my employer adds 8% (14% total). This is done by salary sacrifice.

I have worked out that if I increase my contribution to 10% I will not have to pay 40% tax on my earnings. (employer will still add 8%)

Can anyone see any pitfalls in doing this?

Thanks
Parka

p.s. I have other savings, Cash ISAs and S&S ISAs, so I'm not concerned about locking the money away in a pension fund.

bilbo51

It's quite a normal thing to do. Essentially it means that instead of paying 40% tax now on the pension contribution, you will probably pay 30% on your income when you receive the pension later.

Lokolo

This is what I do (although I use other incentives, such as share scheme and charity contributions as well as pension).

You also save NI.

PParka

Thanks, seems like a no-brainer to me then.

atush

AS long as you can live comfortably on what is left, then yes- a no brainer.

bilbo51

Lokolo wrote: »

You also save NI.

...if the contributions are made via salary sacrifice...

N1AK

PParka wrote:

Can anyone see any pitfalls in doing this?

Thanks
Parka

p.s. I have other savings, Cash ISAs and S&S ISAs, so I'm not concerned about locking the money away in a pension fund.

There aren't any pitfalls, the rules are designed to allow this kind of behaviour. As long as you think a pension is the best place for the money to be (considering the tax implications when receiving your pension) then it's the logical thing to do.

kidmugsy

I think the govt is mad to encourage salary sacrifice and a future govt is bound to scrap it. So use it while it's available.

jem16

bilbo51 wrote: »

It's quite a normal thing to do. Essentially it means that instead of paying 40% tax now on the pension contribution, you will probably pay 30% on your income when you receive the pension later.

Why would it be 30%?

bigadaj

Salary sacrifice of course means just that, so. A reduction in salary could have an impact on things like mortgage borrowing based on multiplier of salary.

Interestingly salary sacrifice actually reduces the differential between higher and standard rate tax payers in tax relief on pension contributions so could be argued is somewhat fairer.

[Deleted User]

kidmugsy wrote: »

I think the govt is mad to encourage salary sacrifice and a future govt is bound to scrap it. So use it while it's available.

Surely the relatively small amount of money the government loses to salary sacrifice is worth it when it encourages people to invest in building their pension?