Pension Advice - Tax Relief

Jonah01

Hi,

I am 34 and am going to start throwing some money at a pension as I have finally got some spare cash available to do so and I now like the idea that you can get the cash again instead of buying an annuity.

I am looking to do a salary sacrifice for my pension. I earn 46k and also get a 4k dividend each year.

My main questions are:

1. Am I right in thinking only the amount above the 40% threshold will get the 40% tax relief? So in my case around 5k? if the limit is around 41k.

2. Can anything be done with the dividend to get it into my pension as I will have to pay tax on this dividend otherwise?

3. I have a lump sum to start my pension of 20k. How does the tax relief work for this. Can I put this straight into the pension. How is it grossed up. Does it get the 40% tax relief or 20% and how does this work. self assessment? or does the pension people take care of this and it gets added to the pension pot automatically?

4. My employer has said they will include the saved NI into my pension pot. Is this ok to do? How much does this equate to roughly?

5. Finally. What is the best way to start a pension. I am quite clued up on finances but no expert. Do most people use a financial advisor when all they want is a low risk private pension? What is the norm.

Any help with these queries would be great.

Thanks

bigadaj

The tax relief is limited to the tax paid so you would be limited to the pay above the higher rate allowance.

What do you mean by a dividend, are you self employed, are these from company shares, a bonus? If this is income then it can be added onto your earnings to get higher rate tax relief, but if it is essentially earnings then you are presumably paying higher rate tax on it by self assessment or notification to hmrc?

Paying through your employer is normally best, they should contribute an amount, the larger schemes they offer frequently have lower charges and in your case they have salary sacrifice so the tax relief is actually 42% rather than 40%. The employer also saves their NI so may contribute some or all, which can be up to 13.8%.

Contributions made through your employer through salary scarifice are gross, and include all teh relief so you don't need to worry about claiming back anything. If you contribute separately then you get 20% relief automatically, and have to claim back the remainder by self assessment.

If you put a large lump sum in then it won't benefit from higher rate relief, so you'd only get 20% on the majority. You can obviously phase this, but if you contribute everything of the higher rate tax you pay anyway it won't really help.

You can do direct to providers or through brokers, hargreaves lansdown but they can eb expensive for larger sums, cavendish are also frequently recommended.

Jonah01

Thanks for your help.

The dividend I receive is from company shares. Does that change anything? Yes I am paying tax on this via self assessment at the higher rate. (25% I think after the tax credit thingy)

What would be the best way to get my lump sum into my pension to attract the 40% relief.

I suppose I could contribute everything I earn above the 40% into my pension and replace my earnings from the lump sum. This would drip feed into my pension. Once the lump sum is gone then I can adjust my pension contribution to a lower level.

I suppose this part could be swayed by what I can do with the dividend?

Does that make sense?

Thanks again.

Triumph13

I believe the trick with the dividend will be just to contribute enough from your salary such that the dividend no longer takes you into the HRT band. You will only get 20% relief on the 'extra' £4k you contribute, but you will avoid the extra tax on the dividend.

Jonah01

Yeah that makes sense to me.

Its just whether I can afford to take my salary down that far so that with the dividend I stay under the higher bracket.

Triumph13

Well that could be where you use the lump sum to replace the extra salary you are contributing, therefore effectively getting your HRT relief and NIC relief on it.

Jonah01

Got ya.

So a salary sacrifice of 9k to bring my salary down to 37k plus the dividend of 4k i would only be paying 20% tax on 27k(37-10k allowance) and none on the dividend.

Simple. I think.

Thanks very much for your help.