Calculating Earnings figure

stevebarrett86

It's is looking likely that I am going to be made redundant in March/April and am considering early retirement at age 58. I am in FSP DB scheme but taking it early would result in reduction of 35% (7 years @5%) so am thinking of deferring until nearer 65 and living off savings etc.

In order to help I am looking at making a contribution into a SIPP this year then taking the 25% TFLS in year 1 and flexible drawdown to match tax allowance in future tax years until it runs out (and topping up to my desired 'income' from other savings). Therefore I wouldn't be just looking at reducing tax to below the the 40% limit but also saving the 20% band as well as it will all be coming back out tax-free (well thats the theory anyway ).

I have calculated my carried forward Annual Allowance and have over £130k that could be used this year ; however the constraint will be 'Relevant Earnings' (RE). I am, therefore, trying to determine what my RE will be this tax year. The complication is that I am not sure how to regard SMART pension contribution and AESOP (employee share purchase scheme) contribution.

Using some simplified but reasonably indicative figures I have the following:
Gross Salary £70k
Non Pensionable Salary (eg bonus) £10k
BIK - Car £3k
BIK - BUPA £1k

The bit I am confused about is treatment of the following. On my payslip SMART (salary sacrifice)pension contributions of £7k are taken off gross salary (on the Payments side of the slip) in calculating Total Gross and then the AESOP conttribution of £2k shown as a deduction and is taken off Total Gross to produce Taxable Gross (as AESOP reduces taxable income).

Therefore are my RE for the year £84k (70+10+3+1), £82k (84 - 2) , £77k (84-7) or £75k (84 -7-2)?

More to the point is it even an issue as presumably it would be pointless from a tax saving point of view to contribute more than £75k to the SIPP as I have already had the tax saving for the existing pension and AESOP contributions ( I am also assuming that even though this would include the £10k tax allowance you still effectively pick up £2k from the taxman due to the grossing up effect?). Therefore, on these sums, I would pay over £60k, HMRC would add £15k - therefore SIPP funded with £75k - and I would claim back £6.6k on SA giving a net cost of £53.k.

Would be grateful for any advice / pointing out errors on above. Thanks.

jamesd

Your core plan is fine - delaying taking the DB looks like a good move, as does making pension contributions now to fund the early part of retirement. I don't see any errors in your post.

SMART pension contributions - salary sacrifice - reduce earned income by the amount of the gross pay that you sacrifice. It appears that AESOP is treated the same way. I'm not sure whether BIK items are counted as earned income, I'll assume that they are. That would make your earned income 84k - 7k - 2k = 75k available for future salary sacrifice or SIPP contributions.

Some types of redundancy payment would also count as earned income.

Why won't you increase your salary sacrifice/SMART pension contributions? You'd get at least some NI benefit from doing that via saving employee NI and possibly also some employer NI contribution. If this money is going into a normal pension pot that you can access independently of the main scheme then doing this beat the SIPP option all the way down to minimum wage - the lowest level your employer is allowed to pay you.

Yes, it would be pointless to pay more than your earned income into the pension but you would not be entitled to the tax relief. A personal pension would claim it but you'd have to declare it to HMRC so they could reclaim it from you. Yes, you'd pay in £60k and get 25% of that added to give you the basic rate tax relief. You'd also tell HMRC the £75k number so that they could give you the higher rate income tax relief that you'd be entitled to on about 35k of that.

Thrugelmir

BIK is not income.

stevebarrett86

James - thanks for the response and basically confirming my thoughts.

Re BIK my reading of the HMRC definition of relevant earnings it is included as earnings

RE284 - Personal Pension Relief: Relevant earnings

The main sources of `relevant earnings' are


emoluments chargeable under Schedule E, including benefits-in-kind such as car benefits, car fuel benefits, private health insurance etc received from non-pensionable employment (but not shares received as benefits-in-kind)

By the way I can't change the SMART pension contributions (as far as I can see) and It all forms part of the the main DB scheme, but thanks for the hint anyway.

Unfortunately my employer is far from generous with redundancy (statutory only after nearly 27 years so a whopping £13k!) so unlikely to be extra earnings from that source depending on PILON.

penwise

I find this difficult. Thanks for the explanation.