Question about lump sum payment into pension

Hi,

I've recently paid a £4.8k lump sum into my pension and it was grossed up to £6k, As a higher rate tax-payer I then claimed back a further £1.2k which I received by a tax code adjustment from 818 to 1117.

However, does the initial £4.8k count as a 'reduction' in my overall gross salary?

For example, if my total gross pay for this year (after other pension deductions) was £50k before I paid in the lump sum is my overall gross pay now equal to £50k-£4.8k = £45.2k (or something else)?

Just trying to understand how this all works as I'm trying to get below the 40% tax rate and the answer to this may make the difference whether I can achieve it or not.
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  • mgdavid
    mgdavid Posts: 6,705
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    No, money you pay into a private pension scheme (not your employers' scheme) comes out of your net pay, not gross. But by claiming back the extra 20% bit of tax you are reducing your 40% liability . Can't comment on whether it removes it all until we know your tax code, any salary sacrifices, etc.
    The questions that get the best answers are the questions that give most detail....
  • greenglide
    greenglide Posts: 3,301
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    The adjustment to your tax code should have increased the amount you can earn before paying tax and raised the HRT threshold accordingly. However the increase in allowance from 818 to 1117 doesn't seem enough to give you that amount?

    The basic tax relief gives you more cash in the pension, rather than reducing the tax burden. If the payment was to an employer scheme coming out of salary you would see a reduction to the taxable salary (subject to tax relief).
  • kangoora
    kangoora Posts: 1,193
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    Hmm, looks like as I was wondering (that a lump sum payment doesn't effectively reduce my income by that amount, only by the amount of tax relief gained unless I'm misunderstanding the above).

    To answer some questions above.

    My tax code was 818L and was increased to 1117L after speaking to HMRC on the phone.

    I only paid £63 tax this month instead of around £780 (which was nice). I had assumed this was catching up on overpaid tax back to April due to the lump sum and going forward I'll pay circa £100/month less tax until the end of the tax year?

    I paid into my employer scheme but via a personal lump sum and not via a salary deduction.

    My tax assessable pay (from my payslip) is looking to be around £52k this year from a 'notional' £59.5k salary (after salary sacrifice of pensions and other miscellaneous items).

    If I can only subtract my personal allowance from that total (£52k - £11k) then it looks like I'm going to be way over getting into the 20% bracket, i.e. £41k when the limit is £31.8k so £9k over.

    Here's the quandary, I could probably boost my salary sacrifice by a lot more but we've recently elected to put £510 (net) per month into DW's pension as she has a tiny pension pot (£18k at 45 years old) compared to my £130k plus DB pensions of circa £12k I can draw at age 60 (currently 52 years old).

    The reasoning behind this was to boost her pension pot so she could withdraw from it tax-free using her personal allowance when she retires. So, forgoing 20% tax relief on me now to gain 20% tax relief on her pension later - it also goes some way to balancing the in-equal pots - does this make sense?
  • jamesd
    jamesd Posts: 26,103
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    It doesn't really seem to make sense. You can get at the tax free lump sum from personal pensions when you reach age 55 and you're only three years from that age. You could use that to fund contributions into a pension for her. That way you would get both your salary sacrifice gain in NI the usual income tax benefits - 40% for you not reclaimed by HMRC from the lump sum, then again income tax benefit for her.

    Employers are free to allow employees to change salary sacrifice contribution levels at any time if they want to, though they don't have to. So yours might let you increase your sacrifice level to eliminate your higher rate tax liability. Assuming that they keep some of their employer NI saving this saves both them and you money.

    You should also check what it takes to get the lump sum out of the work pension. It will probably take a transfer to another pension scheme. So check that such transfers are allowed and how. Some schemes might insist on you stopping contributions then enrolling again, say. Others will just allow it, perhaps with some modest charge.

    Yes, there's a gain from her not paying income tax on some of her pot on the way out but you're losing a bigger gain on your contributions by not paying in with salary sacrifice then just using your tax free lump sum to fund hers. You get both gains. So do.

    Not using the 40% plus NI gains on the lump sum seems wasteful without any useful purpose other than not being willing to wait three years. A bit of patience is the way to go.
  • kangoora
    kangoora Posts: 1,193
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    Thanks Jamesd, I now need another think and review of spreadsheets :)

    I'm looking at contributing 20k/year (including gross-up) into my pension for the next 6 years (catch-up time). That should give me a pot of circa 0.25m at 58 plus any investment gains over that time.

    Our original thought was to not draw the TFLS until I was 58 and then contribute to DW pension then, as DW is 7 years youger than me and intends to work for 4-5 years longer than me to qualify for full NICs.

    Drawing the TFLS at 55 never really occurred to me, I just assumed I would draw it when i retire, hopefully at 58, definitely by 60.

    Another option occurred to us this morning whilst on the daily dog walk, I increase my salary sacrifice by £500/month (net) to get the full benefit of 40% break and we use the lump sum which will happen every October to fund DWs pension as I can get at that without paying CGT on it (monthly shares savings scheme maturing each year). Does that seems llike a more logical way of doing this?
  • jamesd
    jamesd Posts: 26,103
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    Sharesave and your pension beats your original plan but it's still not optimal.

    Say you salary sacrifice into the basic rate range. You'll get 20% income tax plus 12% employee NI plus whatever employer NI you get. It still makes more sense to pay into your salary sacrifice pension then use the tax free lump sum to fund hers because of the NI gains that you never have to pay back to HMRC.

    I've assumed that she doesn't have a salary sacrifice scheme at her workplace. If she does that would make a big difference, so definitely say so. then we'd need to know about the differences between how much of the employer NI is paid for each of them.
  • greenglide
    greenglide Posts: 3,301
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    . You'll get 20% income tax plus 12% employee NI plus whatever employer NI you get
    The employees NI rate above the upper earnings limit (just over £41,000 is only 2% isn't it?
  • jamesd
    jamesd Posts: 26,103
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    Yes, but the plan here is already probably going to be to sacrifice the higher rate portion, so that leaves the basic rate range to consider.
  • kangoora
    kangoora Posts: 1,193
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    Thanks again for the explanation. DW has no current company pension and her firm is unlikely to start before the mandatory date. As the firm has <15 employees I believe this will be by April 2017, assuming they wait until the last minute which I expect will be the case. I highly doubt they will implement a salary sacrifice scheme also.

    We've had a long chat this evening and we're going to (mostly) look at following your recommendations. We'll still start her personal pension but look at putting in less than planned and use the lump sum I get, her wages will easily cover that.

    Meanwhile we'll increase my salary sacrifice to compensate for the reduction in her pension and look at feeding her pension (ideally up to her salary limit) when I take my TFLS for a few years. We'll run her company pension when it starts to get the employer contribution, in parallel with the personal pension if possible (it should be).

    Come November next year we should be in a better position to put even more of my pay into salary sacrifice so we'll take another look at it then.

    Thanks again
  • jamesd
    jamesd Posts: 26,103
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    That seems like a good plan. Getting close to maximum tax efficiency, so you get the largest pension pot size for the money.

    No legal problem to have an unlimited number of pensions at the moment so the work plus personal pension plan when her company offers a pension should be fine.
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