Set up new pension and avoid 40% tax bracket help?

mike5678

Hi all, I wonder if you could help me start a new pension and help me avoid paying 40% income tax at the same time too?

I already have a public sector pension through my employer which I currently pay 12% of my basic wage into. My basic wage is just over £38k, due to go up to £39.5k from March.

I know that doesn't put me in to the 40% tax bracket yet but a lot of my take home pay comes from overtime. I usually work around 80 extra hours per month at a rate of 1.5x pay. None of the overtime income is eligible for pension payments, so I can't increase my contribution to my employer pension scheme, so I only pay roughly £4k in to this per year which I understand attracts tax relief.

By the end of this tax year I'm expecting my final income on my pay slip to read about £56k, so my thinking is that if I've already paid about £4k into my employer pension which should receive 40% tax relief, how much of my savings should I put into a separate private pension before the tax year is out (lump sum) to try to make the best use of my earnings and pay less of it to the taxman? I currently have about £25k in cash savings, £9k in a fixed cash ISA and the remainder in a Santander 123 account.

Am I right in thinking that £56k - £4k (other pension contribution) leaves £12k income taxed at 40%, meaning that if I put £12k in it will be topped up to £14.4k and I'll receive another £2.4k by way of a tax rebate?

The idea is that once I have the second pension set up I'd then make monthly contributions of about £200ish to top up my employer pension for when I retire and to assist in paying less tax now and maybe put in another lump sum again at the end of the year if I have spare cash.

My wife currently earns £26k and has no pension at all but will be on maternity leave from September, we are both 29 and our house is mortgaged if any of that makes a difference.

Another quick question, I understand 20% of the pension payments are topped up into the pot and the other 20% claimed back from the tax man, but is this something I have to do, or is it worked out automatically via PAYE on my payslip via my NI number? I've never had to claim anything from the tax man before or ever do a tax return before so complete novice there. Also what about tax relief on my employer pension, should I have been manually claiming tax back on that all these years? It doesn't have a 'pot' as its a government funded scheme, based on average earnings payable at 60.

Many thanks!

CLAPTON

mike5678 wrote: »

Hi all, I wonder if you could help me start a new pension and help me avoid paying 40% income tax at the same time too?

I already have a public sector pension through my employer which I currently pay 12% of my basic wage into. My basic wage is just over £38k, due to go up to £39.5k from March.

I know that doesn't put me in to the 40% tax bracket yet but a lot of my take home pay comes from overtime. I usually work around 80 extra hours per month at a rate of 1.5x pay. None of the overtime income is eligible for pension payments, so I can't increase my contribution to my employer pension scheme, so I only pay roughly £4k in to this per year which I understand attracts tax relief.

By the end of this tax year I'm expecting my final income on my pay slip to read about £56k, so my thinking is that if I've already paid about £4k into my employer pension which should receive 40% tax relief, how much of my savings should I put into a separate private pension before the tax year is out (lump sum) to try to make the best use of my earnings and pay less of it to the taxman? I currently have about £25k in cash savings, £9k in a fixed cash ISA and the remainder in a Santander 123 account.

Am I right in thinking that £56k - £4k (other pension contribution) leaves £12k income taxed at 40%, meaning that if I put £12k in it will be topped up to £14.4k and I'll receive another £2.4k by way of a tax rebate?

The idea is that once I have the second pension set up I'd then make monthly contributions of about £200ish to top up my employer pension for when I retire and to assist in paying less tax now and maybe put in another lump sum again at the end of the year if I have spare cash.

My wife currently earns £26k and has no pension at all but will be on maternity leave from September, we are both 29 and our house is mortgaged if any of that makes a difference.

Another quick question, I understand 20% of the pension payments are topped up into the pot and the other 20% claimed back from the tax man, but is this something I have to do, or is it worked out automatically via PAYE on my payslip via my NI number? I've never had to claim anything from the tax man before or ever do a tax return before so complete novice there. Also what about tax relief on my employer pension, should I have been manually claiming tax back on that all these years? It doesn't have a 'pot' as its a government funded scheme, based on average earnings payable at 60.

Many thanks!

using your figures
income 54,000
existing pension (gross) payments 4,000
40% tax starts at 41,865

so you are paying 40% tax on 8,135

if you sole aim is to avoid paying 40% then you need to pay 8,135 GROSS into a private pension

i.e. your ACTUAL payment will be 8,135 x 80% i.e. £6,508
this will be automatically topped by by your pension provider to 8,135

You will need to reclaim the other 20% (i.e. 1,627) from HMRC yourself (a letter is usually sufficient ).


do bear in mind that if you have interest from savings that aren't in an ISA you need to declare that to HMRC so it can be taxed at 40%

jem16

CLAPTON wrote: »

using your figures
income 54,000
existing pension (gross) payments 4,000
40% tax starts at 41,865

so you are paying 40% tax on 8,135

Correct apart from the income which the OP said was £56k and not £54k.

Gross payment should then be £10,135.

CLAPTON

jem16 wrote: »

Correct apart from the income which the OP said was £56k and not £54k.

Gross payment should then be £10,135.

oh dear

thanks but I hope the example illustrates the method

AlanP_2

Can I just query the logic behind the math here as you guys are arriving at a different answer to me?

I have only just started on the PP route for a HR taxpayer and have yet to make a claim so I think I must have got something wrong somewhere but can't see where at the moment.



Taking a simple example:

Pay £6 into a Private Pension i.e. out of after tax income.

The provider would reclaim BR tax = £1.50 => Gross of £7.50.

HR taxpayer needs to reclaim the additional tax from HMRC which I make an additional £2.50 in this example to give a gross amount of £10 which if it were taxed at 40% would take you back to the £6 that I started with.

This seems logical to me as turning it on it's head - If that £10 was put into an employer scheme that adjusts for the relevant tax rate through the payroll system then it's net cost would be £6 as no tax would be paid on it.

However the posts above would suggest that, in my example, another equal amount of £1.50 would be reclaimed via HMRC making £9 gross, which, if taxed at 40% would be a net £5.40.


In my simple spreadsheet I have allowed for that fact that net payments to a PP will attract a 66.67% uplift (£4 on £6 from above example) and that 25% of this will be reclaimed by provider and added to pot.

The remaining 41.67% will be reclaimed from HMRC (and in my plan paid into the pot in the following tax year but that is personal choice and not mandatory or automatic).


So using the figures worked through by Clapton for simplicity (although realising Jem16 has corrected this):

Pay in a net £6508 and provider reclaims BR tax (+ £1627) gives £8135 going into pot.

£6508 is 60% of the overall gross figure so increase by 2/3rds or 66.67% for ease => + £4338.88, less the £1627 already claimed leaves £2711.88 to come back via HMRC and PAYE code.

Overall grossed up amount is £10,846.88, which would be £6508.13 after 40% tax deduction.


The first few times I worked this through in the early planning stages I didn't believe it but I can't see the flaw in my maths - although I am sure it is there somewhere.

Thanks

Triumph13

The flaw is that the tax reclaim you make ISN'T going into the pension - it's going into your pocket.


If you put in £6 net then it gets grossed up to £7.50 and you get the other £1.50 back meaning you've paid £4.50 net for £7.50 gross.


If you want to put £10 in gross then you have to pay £8 net in. That gets grossed to £10 and you get a tax rebate to bring your net cost to £6.

Dunnit

It may be worth your while starting a pension for your wife. Even if not working she can pay in £2880 which is grossed up to £3600. At retiral age it would make sense if she could have a pension large enough to take her up to the maximum of her personal allowance.

Triumph13

Dunnit wrote: »

It may be worth your while starting a pension for your wife. Even if not working she can pay in £2880 which is grossed up to £3600. At retiral age it would make sense if she could have a pension large enough to take her up to the maximum of her personal allowance.

On current tax rates this only makes sense once you have used up all your available higher rate contributions. Contributions for you turn £60 in into £85 out (£100 gross with 25% tax free, 75% at basic rate) which is a 41.7% gain. Contributions for her turn £80 into £100 if she has unused PA in retirement - a 25% gain.


The order therefore is your 40% band first, then enough for her to use up her PA in retirement.

Dunnit

Agreed, it was so that he could find a home for the money he was going to be rebated from HMRC. Even non earning wives have the scope to be taking advantage of the tax benefits of about £13.3k per year for 10 years then less any pension for the rest of their life.

kidmugsy

The 40% rebate is at risk politically. So there is a case for getting on with it in this tax year.

mike5678

Thanks for the replies guys.

So if we say £56k - £4k - £41,965 = £10,135 gross payment required, so I pay in 80% of that, being £8,108, I should them claim back £2,027 from the taxman?

This seems like a good idea to me. Is this how you guys would be organising your cash based on these figures?