Paying into pension from net salary

suebfg

Hi, my company only offers a stakeholder pension and pays no contributions. I already have a stakeholder pension so would prefer to use that.

Question is, if I pay into my own stakeholder pension from my net salary, will I still end up in the same position as if the pension were paid from gross salary? I complete a self assessment form every year so does the tax right itself in the end?

Thanks

xylophone

http://www.hmrc.gov.uk/incometax/relief-pension.htm

Paul_Herring

suebfg wrote: »

Question is, if I pay into my own stakeholder pension from my net salary, will I still end up in the same position as if the pension were paid from gross salary? I complete a self assessment form every year so does the tax right itself in the end?

Not entirely.

If you're contributing from gross pay (salary sacrifice) you won't get any NI or income tax taken off it.

If you contribute from net salary, you can recover the income tax that's deducted (as xylophone's link indicates) but not the national insurance (which the link fails to mention.)

So, (presuming mid-range salary for NI/IT purposes to simplify the example) for every £100 gross, you'd normally get taxed £20 income tax, and £12 national insurance.

If you sacrifice from gross pay, the whole of that £100 goes into your pension pot.

If you pay out of net pay (£68) you'll get that £20 income tax back on contributing it (the pension company will add it automatically,) but you've lost the £12 NI, for a total of £88 going into your pension.

(Things get a little murkier when you're a 40% tax payer, since (i) you're likely to only be being deducted £2 per £100 NI in that band, and (ii)half of that 40% IT you'll need to reclaim on your Self Assessment.)

jem16

Paul_Herring wrote: »

If you're contributing from gross pay (salary sacrifice) you won't get any NI or income tax taken off it.

Many occupational pensions are paid from gross salary but NI is still due on the full gross pay. It doesn't necessarily follow that all contributions paid from gross salary are salary sacrifice schemes.

If you pay out of net pay (£68) you'll get that £20 income tax back on contributing it (the pension company will add it automatically,) but you've lost the £12 NI, for a total of £88 going into your pension.

If you paid £68 into a pension scheme, you would only get £17 basic rate tax relief added with a total of £85 going into the pension.

Paul_Herring

Point noted about occupational schemes vs salary sacrifice, however..

jem16 wrote: »

If you paid £68 into a pension scheme, you would only get £17 basic rate tax relief added with a total of £85 going into the pension.

So you don't, in fact, get to claim back all the income tax generated from that £100? Or have I inadvertently created across one of those so-called 'puzzles,' and I've got something wrong along the way? (I have a sneaking suspicion it's the latter...)

• Income tax is charged on the full 100% gross
• NI is likewise (double-)charged on the same 100% gross (i.e. neither calculation is performed on the sum after the other is applied)
• Thus putting, into the pension fund, the net result after the calculations won't - in fact - give the full IT charged (i.e. the 25% of net rebate is on net after both have been removed, not just the 20% IT)

... there was I thinking I had a handle on all this pension stuff then another curve-ball gets thrown in.

jamesd

suebfg wrote: »

Question is, if I pay into my own stakeholder pension from my net salary, will I still end up in the same position as if the pension were paid from gross salary?

That depends on what you mean by gross salary and how the particular pension scheme uses gross salary deductions.

If it is a deduction from gross salary by salary sacrifice you will be better off in tax terms because you will save the NI as well as income tax.

If it is a deduction from gross salary not by salary sacrifice then your position will be the same.

If you are a higher rate tax payer and not using salary sacrifice you can get the higher rate tax relief during the year by telling HMRC how much you expect to make in pension contributions. They will adjust your notice of coding to give you the relief. This doesn't matter to those on basic rate tax because they already get that relief taken care of when they make their contributions.

Perelandra

jamesd wrote: »

If you are a higher rate tax payer and not using salary sacrifice you can get the higher rate tax relief during the year by telling HMRC how much you expect to make in pension contributions. They will adjust your notice of coding to give you the relief. This doesn't matter to those on basic rate tax because they already get that relief taken care of when they make their contributions.

And just to add to the above (in case it's relevant to the OP and subsequent questions): for higher rate taxpayers, after the tax relief adjustment, it can appear that you have not received the full tax relief, but this is, in fact, not the case (ie you do get the full tax relief you are due):

Ignoring the NI, as already covered above:

Scenario 1: (money paid from gross income): £100 in pension, no tax to pay or further tax relief due

Scenario 2: (money paid from net income):

Gross income received: £100
Net of Income tax (ignore NI): £60: paid into pension

Basic rate relief added: £15 (added to pension)
Impact of tax relief through coding notice: £15 (received as lower tax paid on earned income)

Total benefit received: £90

So this can appear as though you've been shortchanged, as you now only have £90 of 'benefit', rather than £100. However the nature of those benefits has changed (Scenario 1, all in pension. Scenario 2, most in pension, some as additional cash).

If you then were to put the £15 of cash into the pension, and do this iteratively until you had no additional cash at all in Scenario 2, you'd end up with £100 in the pension.

jamesd

A slightly different way of presenting the higher rate tax part of that:

Pay £60 net, end up with £75 in the pension pot. Higher rate tax relief on £75 in a pension pot is £30. £15 of that was paid into the pension pot and the other £15 is returned via the notice of coding or a direct payment from HMRC.

jem16

Paul_Herring wrote: »

So you don't, in fact, get to claim back all the income tax generated from that £100? Or have I inadvertently created across one of those so-called 'puzzles,' and I've got something wrong along the way? (I have a sneaking suspicion it's the latter...)

• Income tax is charged on the full 100% gross
• NI is likewise (double-)charged on the same 100% gross (i.e. neither calculation is performed on the sum after the other is applied)
• Thus putting, into the pension fund, the net result after the calculations won't - in fact - give the full IT charged (i.e. the 25% of net rebate is on net after both have been removed, not just the 20% IT)

I think the problem is that you are looking at the net result after tax and NI have been deducted, whereas you should only be looking at the net result after tax has been taken off.

With £100 if you pay in from gross pay (not salary sacrifice) you get £100 in the pension. You will have saved £20 in tax.

If you pay in from net pay, you would pay in £80 and get £20 added by the pension provider so £100 in the pension.

In both cases you have got a £100 contribution for £80.

The NI is totally separate as in each case you will still pay £12. You cannot get this back.

The only saving for NI is in the case of salary sacrifice schemes and, at the moment, final salary schemes that pay a reduced rate of NI.

Paul_Herring

jem16 wrote: »

The only saving for NI is in the case of salary sacrifice schemes ....

That's basically the one I was assuming, (since I, myself, may very soon have to switch from salary sacrifice to contributing from net pay, for reasons that have nothing to do with this thread.)

suebfg

I'm little confused so will try to provide some additional info. I am a higher rate tax payer (in the £45 - 50K bracket). I'm not in a salary sacrifice scheme. So is it the same whether I pay from gross or net? Thanks all!