Pension contribution and Salary?

dancingfairy

Hi. I'm hoping you can help me. I'm starting a new job soon and am trying to work out how much I can afford to put into a pension. Does paying into a pension affect how much tax, Ni or student loan I will be paying? I'm hoping to increase my percentage contribution slightly but unsure if it will impact my net pay pound for pound or whether it will reduce my net slightly less due to tax etc. If someone could explain the order of caluclations and deductions that would be great.

Second question is if I start work in December and get paid in early - mid January will my tax allowance at that point be 9/12 of the total (for December) or 10/12? I haven't used up all of my tax allowance this year so am trying to work out what month I will be paying tax from.

Many Thanks for any help.
df

bigadaj

The pension question is straightforward, you save the tax so assuming a basic rate taxpayer you would pay 4£ in £5 of the pension and the government woud contribute the difference. If you are higher rate then you only pay £3 for the £5.

You save the national insurance if your company allows you to salary sacrifice. So if you can its worthwhile, they also save employers NI so see if they will also donate this or maybe split it with you.

For the second question then you start paying tax in your new job from the day you start, not the day you're paid. Are you currently ina job, if so then the allowance is split per month so you won't notice any change. If not then your allowance is for the whole year, so if you work for four months this gives you over £2k monthly before you start paying tax. This will then impact on your pension in terms of tax relief, so might be worth delaying your pension start until the next tax year.

I'm not sure of the student loan issue, I believe it's based on your gross lay and so ignores pension but could be wrong, it might also depend on your exact student loan type, ie when it was taken out.

dancingfairy

O.k so pension is calculated from gross pay and then tax and ni is calculated after the pension amount is taken out? Is that right? So on 1500 gross, pension would be 225 but tax would only be calculated on the (1500-225)? (Obviously this is assuming I had started at the begining of the tax year).
In terms of the job I get paid end of Nov (old job) but wont' then get paid again until early Jan (new job). I am assuming by then I will have accrued 10/12 of my total tax allowance at that point? So 7866 so any earnings above that I pay tax on, below that then none. If my calculations are correct then I won't have to pay any tax until Mar.
df

bilbo51

dancingfairy wrote: »

O.k so pension is calculated from gross pay and then tax and ni is calculated after the pension amount is taken out? Is that right?

Pedantically, NI is calculated on gross income before your pension is deducted, unless your employer is operating a salary sacrifice scheme where your pension contributions are not exposed to either tax or NI.

zagfles

Student loan repayments are based on the same income as used for tax, ie gross income after pension conts deducted. So if you're a basic rate taxpayer each £1 you put into thepension will save you 20p tax and 9p student loan repayments, plus 12p NI if it's salary sacrifice. Or 40p plus 9p (plus 2p NI if sal sac) if you're a higher rate taxpayer.

Perelandra

zagfles wrote: »

Student loan repayments are based on the same income as used for tax, ie gross income after pension conts deducted.

I never realised this. So if you were to increase your pension contributions to a sufficient level to take you under the threshold, you could delay repaying your student loan for a long time- possibly never? (30 years)?

Nice!

Reue

Perelandra wrote: »

I never realised this. So if you were to increase your pension contributions to a sufficient level to take you under the threshold, you could delay repaying your student loan for a long time- possibly never? (30 years)?

Nice!

Yes, you could delay or attempt to avoid repaying all the tax-payers who have funded your voluntary further education.

[Deleted User]

There's conflicting information available about student loan repayments. I can find sources confirming it's before pension contributions and others suggesting that it's after. The government website doesn't mention which, it just says that student loan repayments are taken from "income".

Looking through this "Tax Calculation" document from HMRC (section 21) I believe that pension contributions are not counted, so if you've earned £20,000 then for student loan purposes you have an income of £20,000, regardless of if you've contributed £5,000 of that pre-tax income to a pension. However I'm not an accountant so it's possible that there's something I'm misunderstanding.

With that in mind (contradicting information, unclear to the layman calculation forms) I would highly recommend that you contact HMRC and check because this seems to be an unclear issue.

jamesd

dancingfairy wrote: »

O.k so pension is calculated from gross pay and then tax and ni is calculated after the pension amount is taken out? Is that right?

Only if the employer is using a salary sacrifice scheme. If they are just deducting pension contributions from pay then the NI is calculated before pension contributions are deducted. It's why salary sacrifice is useful.

Salary sacrifice is a change in your employment contract where the employer agrees to make pension contributions and to pay you less. Since you aren't getting paid the money, you don't pay NI on it. The employer also doesn't pay employer NI on it and it is common to have non, half or all of the employer NI saving added to the amount paid into the pension.

Both salary sacrifice and non-salary sacrifice are common. To find out which applies you need to ask. Salary sacrifice is best because it saves you at least your 12% employee NI on basic rate income on the pension contribution.

zagfles

citricsquid wrote: »

Looking through this "Tax Calculation" document from HMRC (section 21) I believe that pension contributions are not counted, so if you've earned £20,000 then for student loan purposes you have an income of £20,000, regardless of if you've contributed £5,000 of that pre-tax income to a pension. However I'm not an accountant so it's possible that there's something I'm misunderstanding.

See box K34 "Relief for pension contribution"

jonboysez

There is a difference between the old style (Mortgage type) student loans and the later Income Contingent type loans - the latter is repaid through PAYE, but the mortgage type is paid through direct debit from your bank account once your "income" is above the threshold - I know pension contributions are allowed to be deducted from income when assessing the threshold for income contingent loans but I'm not sure the same applies to the old style loans - does anyone know categorically if it does as I might have to pay into a pension or via a salary sacrifice scheme to reduce my wage below the threshold if it is allowed - nowhere can I find an answer to this and I'm reluctant to phone the SLC as I recently asked if pension received had to be taken into account when assessing total income for old style loans and the girl on the other end seemed clueless - she came back with the answer if its taxable income it must be included (which ought to suggest that payments the other way to a pension should be deductible from income as they are not taxed - but they can make their own rules as its not through PAYE!) Anyone know categorically?