Private pension + Work pension / Tax Relief

djohnst

I have recently taken a promotion at work which will see my income go over the £121,200 threshold for loss of personal tax allowance and understand from the helpful folks on the cutting tax board that under PAYE, pension is the primary vehicle for getting back under the threshold.

I currently pay into a pension provided by my employer where they match the contributions. I can up my contributions at annual enrolment in January and will likely do this.

The challenge is that a good chunk of my income above the £100k mark comes in the form of a large bonus at the end of the year which is difficult to predict sufficiently to adapt my pension contributions once a year.

So my questions are:

1.) Can I have a private pension in addition to my work pension?
2.) Do some private pensions allow you to make a lump sum deposit? (i.e some of my bonus)
3.) Would a private pension have the same tax efficient effect which contributing to my workplace pension has?

Thanks in advance

Debt_Free_Chick

Yes to all your questions. The timing of the tax relief might differ, but overall you get the same relief

atush

yes,

yes,

Maybe. No3 depends on if you get salary sacrifice or not. If you did, you'd get 42% tax relief instead of 40.

Spidernick

atush wrote: »

Maybe. No3 depends on if you get salary sacrifice or not. If you did, you'd get 42% tax relief instead of 40.

Or more correctly 62% or 60% for the income between £100,002 and £121,200, which I think is the whole point of this exercise for the OP.

Playing_with_Fire_2

Have you checked that you can't make an extra change to the pension contributions for the work pension?. We can only select most benefits once a year, but have an extra chance for pensions and if we have a 'life event' (also my work don't ask for proof if the life event is related to your partner).

Yes you can put a lump sum into a private or personal pension. Check with the provider for specifics. I'm with Best Invest and can make a BACS or debit card payment in whenever I like. You need to do this before the end of the tax year. The pension provider will (normally) claim basic tax relief on your behalf (which will go into the pension), and then you can get the higher rate and PTA back from self assessment or by writing to HMRC with evidence of the payments. [I don't know about self assessment, but it took me months to get my tax relief back when I had plans for it which was an unfortunate surprise.]

Remember the extra tax relief goes to you, not into the pension, so build this into your calculations when you are working out how much of the bonus/salary to send towards the pension. You'll also need to check that you don't exceed the annual contribution limits or lifetime allowance.

[The 2% difference other posters are talking about is National Insurance contributions]

djohnst

Thanks everyone for the good advice.


@Playing with Fire - No changes mid-year unfortunately, it's a one time per year benefit selection window for the regular monthly pension contributions and no option for a lump sum.


Assuming I open a private pension which allows lump sums, it sounds like just before the end of the tax year I can calculate my earnings to date, and contribute the difference between £100k and my actual earnings to my private pension as a lump sum to achieve this tax relief outcome?


Given that I will have already paid tax on most of the money through PAYE and I right in saying that 20% will typically be claimed by the pension provider and put into my pension? Does this mean that for a pension contribution of £21,200 (for example), my net contribution would only need to be £16,960 (80%) ?


And finally, I can then claim an additional 40% (to create 60% total relief) by writing to HMRC?


Thanks again

gadgetmind

Whether you pay into your pension by salary sacrifice is the critical issue. If you don't, then paying into another pension works in exactly the same way, if you do, then you'll have to get as close as you can with regular contributions.

gadgetmind

BTW, I'm in a similar position, and HMRC delight in sending me tax codes with no personal allowance. I call them and tell them that I'll be making pension payments to keep within their limit, they than ask for my estimated income, and I give them £99,999.99 - they tell me that this is a popular salary.

Once this is done, pension contributions get 20% relief within the fund and then 20% extra via your tax return. I could claim back the tax on personal allowance via this too, but TBH prefer the money in my bank account.

jamesd

djohnst wrote: »

3.) Would a private pension have the same tax efficient effect which contributing to my workplace pension has?

Depends on whether the work pension is salary sacrifice or not. If not salary sacrifice there is no difference except in the timing of receiving tax relief and the need to tell HMRC about your planned pension contributions to get your tax code adjusted to deliver you your higher rate income tax relief.

If salary sacrifice at your income level there is a 2% extra amount put into your pension because you will save employee NI on the pay you sacrifice. Some employers will contribute some of their saved employer NI, perhaps half of it, another potential 6.9% to add.

Employer matching often has caps that wouldn't match all of the contribution level you're contemplating.

You also need to know that the £40k allowance for pension contributions is based on the gross amount that arrives in the pension, including all employer matching and salary sacrifice NI gains and tax relief. You can carry forward unused allowance from the last three years if you were in any pension scheme, even if not paying in. You can't pay in more than your earned income in the tax year of the contributions but the carry forward can let you go over the £40k.

djohnst wrote: »

I currently pay into a pension provided by my employer where they match the contributions. I can up my contributions at annual enrolment in January and will likely do this.

The challenge is that a good chunk of my income above the £100k mark comes in the form of a large bonus at the end of the year which is difficult to predict sufficiently to adapt my pension contributions once a year.

If your workplace scheme is salary sacrifice or you are getting employer matching then I suggest that you adopt an optimistic plan and pay into the pension enough to get your personal allowance back if you get a generous bonus. Your income is high enough that you should have no difficulty using credit card borrowing at low cost to smooth out your income year on year if the bonus is below the optimistic estimate.

If you do go to the point where you lose personal allowance, don't let it happen a bit each year. Arrange it to happen in one year then go one or more years with no loss. You can only lose the personal allowance once each tax year, so lose it and take income all the way up to 150k in one year, then contribute to stay under £100k for as many years as it takes to balance things out. Alternating years of £100k and £142k is cheaper for you than being at an even £121k every year and losing the whole personal allowance each year instead of one in two years.

If you are close to or over age 55 it's worth knowing because this can substantially affect your planning, knowing that the 25% tax free lump sum can be drawn from a pension without affecting your ability to contribute in future years. This can substantially help with the cash flow smoothing.

gadgetmind

jamesd wrote: »

You can't pay in more than your earned income in the tax year of the contributions but the carry forward can let you go over the £40k.

If going anywhere near this limit, someone needs understand Pension Input Periods, the three year rule for losing Carry Forwards, the bizarre mini PIP at the start of this tax year, and much more. I do all of this tracking and these calculations myself, but most people wouldn't, couldn't or shouldn't!

If you do go to the point where you lose personal allowance, don't let it happen a bit each year. Arrange it to happen in one year then go one or more years with no loss.

I've also been playing that game. Last year was a "way over but under £150k" year whereas this year I should *just* be able to keep to the five digits. I can do this as I can choose when to exercise unapproved share options. On these I have to pay employee NI, employer's NI, and tax, so paying tax at 60% would mean I'd get only a pittance from the exercise with the bulk (about 2/3rds) going to the tax man.

How larger a disincentive to work could you present someone with?