40% tax relief calculation query

M1ssSmith

Hi, new to the Forum and looking for some advice please!


I have taken voluntary redundancy (Civil Service) and want to try and contribute the maximum possible into my private Stakeholder Pension to maximise 40% tax relief.


I'm leaving work at the end of the month. The figures are;


salary (64k) pro rata = 43k
compensation payment = 62k
total income 16/17 therefore 105k
minus 30k tax free element 75k
income taxed @ 40% therefore 32K


Civil Service Pension input figure 16/17 (pro rata) 6k


Is it as simple as deducting the 6k pension input from 32K, giving 26k or am I over-simplifying?
Thanks!

Linton

The calculation is that simple assuming the £32K is correct taking into consideration your personal allowance, though there is one addition. When you pay money into a personal pension it would come from taxed income. Therefore you should pay 80% of £26K into your pension and HMRC would refund the basic rate tax directly into your pension putting it back up to £26K. You would get the excess higher rate tax refunded to you rather than your pension as part of the year end tax calculation, or earlier if you request it.

Acquinas

I think it's a bit more complicated actually. I went through this a few months ago and this is what I found. The way that the compensation lump sum is taxed is that the payment is effectively treated as if it is a regular monthly payment of your salary. So, if they are paying you out £62k, they will assume that your annual salary is 12 x £62k. Sure the first £30k is tax free, but they will apply 45% to the top-slice as the calculation is that you are being paid over £150k a year. In my case it mean that I paid at 45% on everything above about £43000. I mitigated this by using some of the lump sum to buy additional pension. Any you can claim back the rest from HMRC. I'm currently a basic rate tax-payer again so the over-payment of tax is being refunded through my new employer's payroll. OK, you end up essentially no worse off, especially if (somewhat counter-intuitively) your salary drops once you leave. But it is a bit of a hassle and is less than clear.

One thing I have been trying to set up is to see how I can keep working and contributing while drawing down the civil service pension. Up until yesterday I had assumed that I could avoid 40% tax by paying in about £8000 a year to my stakeholder pension. Now it seems that the maximum I will be able to pay in is £4000. So I think I may have to make a big contribution before the new rules kick in.

xylophone

One thing I have been trying to set up is to see how I can keep working and contributing while drawing down the civil service pension.

Taking benefits from a DB Scheme Pension does not trigger MPAA.

See post 3 https://forums.moneysavingexpert.com/discussion/comment/71659243#Comment_71659243

And from Zurich's guidance on MPAA


What events don’t trigger the MPAA?


The MPAA will not be triggered by any of the following
payments:

• Pension Commencement Lump Sum (PCLS) from
a flexi-access drawdown arrangement (i.e. no
income taken)
• A trivial commutation lump sum
• Small pots commutation lump sum
• Receipt of a scheme pension
• Receipt of a lifetime annuity

M1ssSmith

Acquinas wrote: »

I think it's a bit more complicated actually. I went through this a few months ago and this is what I found. The way that the compensation lump sum is taxed is that the payment is effectively treated as if it is a regular monthly payment of your salary. So, if they are paying you out £62k, they will assume that your annual salary is 12 x £62k. Sure the first £30k is tax free, but they will apply 45% to the top-slice as the calculation is that you are being paid over £150k a year. In my case it mean that I paid at 45% on everything above about £43000. I mitigated this by using some of the lump sum to buy additional pension. Any you can claim back the rest from HMRC. I'm currently a basic rate tax-payer again so the over-payment of tax is being refunded through my new employer's payroll. OK, you end up essentially no worse off, especially if (somewhat counter-intuitively) your salary drops once you leave. But it is a bit of a hassle and is less than clear.

.

Interesting. Would it not be possible to phone HMRC and explain the situation so this doesn't happen? I will be a 0% tax payer 17/18 so not too much hassle as I will claim the overpayment back, but good to be pre warned about this.

Linton

M1ssSmith wrote: »

Interesting. Would it not be possible to phone HMRC and explain the situation so this doesn't happen? I will be a 0% tax payer 17/18 so not too much hassle as I will claim the overpayment back, but good to be pre warned about this.

No, the over payment is tied into how PAYE works - until you have had one payment the tax codes arent calculated band so an emergency code is used.. However there is a form which you can fill in which will get you the tax refunded so you dont need to wait until the end of the tax year. see here.

M1ssSmith

Thanks Linton, that's really helpful.