Overpay into Pension

ColdIron

guitarman001 wrote: »

Am I right in saying that interest earned on bank accounts can't push you into a higher tax bracket? So if you're sitting on the cusp of the 40% band and you get £10k interest (yeah, right) per year, that doesn't push you into the higher band.

Nope, interest is treated as income and therefore is added to earnings and will push you into HR tax. Capital gains is subject to CGT but the rate you pay, 18% or 28%, will depend on your income. Another reason to get below the HR threshold

bowlhead99

guitarman001 wrote: »

Am I right in saying that interest earned on bank accounts can't push you into a higher tax bracket? So if you're sitting on the cusp of the 40% band and you get £10k interest (yeah, right) per year, that doesn't push you into the higher band.

No, you're not right. Your income tax is based on what income you have. If you have £42000 of employment income and £500 of interest income, or £500 of employment income and £42000 of interest income: you have £42500 of income. You get £10,600 personal allowance, £31,785 of 20% band and after that you're in the 40% band.

If the current government is still in power for the 2016/17 tax year they have said they'll not tax you on your first £1000 of interest income (if a basic rate payer) or £500 of interest income (if a higher rate payer). As a consequence, banks will no longer deduct anything at all at source and if you earn more than your allowance you'll have to declare it.

So other than earned income through employment, what else can push you into the band? Capital gains on shares not in an ISA or property?

Both of those things (though you have a separate annual allowance for capital gains). Business income, property rental income, dividend income (not in an ISA) would be examples of other types of taxable income.

It's a real pain having to tell HMRC you have to pay an extra 20% tax on top of the 20% the banks take. Or 40% if P2P as they take nothing at source.It'd be so much easier if the banks just did it for you but I can see the complications.

As you say, it's too complicated for the banks. They don't know what you earned from all of those different sources or what allowances you have. Only you know what you earned for the year, so you (not your bank) do a self assessment to make sure you pay the right amount.

So anyway! Hmmm....If you earn anything over than £42,385 you should put it all into pension to avoid the higher tax bracket. Tough one...

Should is too strong, IMHO.

If you earn anything over £42,385 you might like to put some of it into a pension to avoid 40% tax on that income. If you can afford to, you can put all of the excess into a pension to save or defer the maximum amount of tax.

I don't put anything like all of the money I earn over £42,385 into pension, because I can't afford to do that and still cover all my short and medium term wants and needs. But I do put some into a pension more than the absolute bare minimum I am allowed to.

guitarman001

so your own interest / capital gains determines how much interest you pay. One can be forgiven for thinking it's a tad convoluted!
Thanks, though, guys - appreciate your help

I don't think I'll push myself below the 40% band - it's too much.

atush

Basically it all depends on the govt elected.

The curent one will give you a savings allowance where no tax is deducted from savings. the others will tax you on all savings.

bowlhead99

guitarman001 wrote: »

so your own interest / capital gains determines how much interest you pay

typo, you mean ...how much income tax you pay

One can be forgiven for thinking it's a tad convoluted!

Why, because your own income determines how much income tax you pay? That doesn't sound convoluted at all.

Basically we have a system this country where you pay tax on earned income (from a job) and unearned income (from cash deposits and investments). At higher rates of income you pay a higher rate of income tax on new pounds of income. If you give away income (to charity) or divert it into tax efficient investment schemes (pensions, VCTs etc) you can avoid tax on some or all of it. It's not really rocket science, when you get your head around it.

Thanks, though, guys - appreciate your help

I don't think I'll push myself below the 40% band - it's too much.

No shame in that. The closer you get to it, the more tax you'll have saved; it doesn't really matter if you get all the way there or not.

BobQ

guitarman001 wrote: »

Who does this in order to bring them out of 40% tax bracket (for savings interest etc)? Just curious... Would like to build my savings for a home at some point and overpaying into pension would limit this, but at the same time would like to do that to get around having to submit a tax form at year end for the extra 20% tax on accounts...

AS has been said putting money into a pension is tax efficient within the annual allowance and good to do in a planned way. But you also need to be sure that your ability to buy a house is not compromised by the lack of savings for a deposit since you cannot get the money back until the minimum age without punitive tax.

I suspect that minimum age will rise whoever forms the next government. As I recall in ithis Government's consultation paper one of the ideas being floated was to match the minimum age to the state pension age. I think the example given was SRA less 10 years. Clearly it could be anything but that might be a reasonable thing to plan for.

gadgetmind

ratechaser wrote: »

If you're not on a massive salary, why would you expect to have to complete a tax return?

Well, my wife has to complete a tax return every year and her income doesn't even exceed her personal allowance!

And of course, £42,385 isn't a massive salary for someone with a decent degree. Even in engineering, graduate starting salaries are close to £30k and they can hit higher rate tax after just a few years of experience.

ratechaser

gadgetmind wrote: »

Well, my wife has to complete a tax return every year and her income doesn't even exceed her personal allowance!

And of course, £42,385 isn't a massive salary for someone with a decent degree. Even in engineering, graduate starting salaries are close to £30k and they can hit higher rate tax after just a few years of experience.

Personally that sounds nuts to me, unless HMRC are suspicious about something! Has she questioned the need for the return with them?

Anyway, thanks to Bowlhead for putting me straight as I really did think that 100k was pretty much the threshold where the tax man started to take an interest

badger09

ratechaser wrote: »

Personally that sounds nuts to me, unless HMRC are suspicious about something! Has she questioned the need for the return with them?

Anyway, thanks to Bowlhead for putting me straight as I really did think that 100k was pretty much the threshold where the tax man started to take an interest

You might like to read this.

https://www.gov.uk/self-assessment-tax-returns/who-must-send-a-tax-return#1

So several reasons why Mrs gadgetmind might have to complete a tax return

hugheskevi

I mean making extra contributions. Employer pays 9%, I pay 10% currently. Thing is being younger I want to save for a house and it'd reduce my income by a fair bit in order to be taken out of the 40% band. Also, the pension could just under-perform or disappoint at retirement (if I get there) etc...

You also need to consider how the pension Lifetime Allowance of £1m affects your plans - being young and contributing tens of thousands to a pension means you are likely to be in danger of exceeding the Allowance (with harsh tax consequences on the amount in excess of the Lifetime Allowance), particularly if you get decent returns on the pension investments.