Lump Sum Contribution - this or next tax year?

JBmoneysaver

Hi All,

I have a significant lump some I received recently and I have thus far used it to clear the last of my mortgage, and the 1 loan I had. I am looking to make around a 30k contribution to my pension as well as I am higher rate tax payer this would give me a furtehr 7.5K into pension from basic tax and £7.5k to reclaim via SA.

Due to a further bonus expected in June this year my salary is going to be gross around £115k net around £105k. I had planned to make contribution to pension this tax year to enable me to quickly claim back the 20% higher rate tax by doing my tax return early. This also comes back in to essentially pay the ~£6k CGT bill I will have in 2016-17 due to the lump sum received (FYI most of my lump sum is exempt from CGT due to the nature of shares).

In looking at the figures it seems to me that it would make more sense for me to pay into the mortgage next tax year to enable my net salary to be below £100k to prevent me from losing my tax free allowance.

The downside being that I will then have to wait till 2018 to reclaim the higher rate tax from the payment.

My pension scheme is salary sacrifice, thus I am currently reviewing if I could increase my monthly payment so that I just reduce my tax in general pre-tax return and then make a smaller lump contribution.

All feedback most welcome.

MichelleUK

Do you have two pensions? One salary sacrifice with your employer and one 'relief at source' scheme, maybe a SIPP or something? It is a bit unclear from your post if you do, as the tax relief methods and timings are different.

kidmugsy

JBmoneysaver wrote: »

it seems to me that it would make more sense for me to pay into the mortgage next tax year to enable my net salary to be below £100k to prevent me from losing my tax free allowance.

You mean pay into the pension, not into the mortgage, I assume?

JBmoneysaver

Yes I meant into the pension not the mortgage

in relation to
"it seems to me that it would make more sense for me to pay into the mortgage next tax year to enable my net salary to be below £100k to prevent me from losing my tax free allowance."

I have one pension I actively contribute to and its salary sacrifice via employer.

bowlhead99

If you put the £30k net into a private pension scheme and have it grossed up to £37.5k for basic rate by the pension provider, you can claim a further £7.5k for higher rate relief direct from HMRC. As you say, that £7.5k they'll owe you for 2016/7 will mostly get used cancelling out the £6k CGT you owe them for 2016/7. So it doesn't matter massively whether you do the tax return quickly or slowly (up to 31 Jan 2018) as both amounts are due at the same time and the balancing cash they'd be sending you (£1.5k) isn't thousands and thousands.

If you do want to put a £37.5k gross into a pension this tax year you are going to have to do it with a private personal pension as described above, because you presumably don't have enough salary left in Feb and March 2016/17 for your employer to be able to knock that salary down by 37.5k and still pay you minimum wage. You don't even earn £10k a month let alone £18k. So presumably you are planning to open up a new private pension with your "lump", right?

It would make sense to make sure you do have enough cashflow to get through 2017/18 and still be able to make £5k of extra gross pension contributions that year. So, if funds are tight because you have an expensive lifestyle and won't have been able to save much next year, then perhaps just do a smaller amount into the pension this year.

You could do £28k instead of £30k net contribution to the personal pension this year. This would still generate HMRC "cashback" of £7k to easily cover your £6k CGT bill and leaving £2k in the bank because of only doing a £28k payment (£35k gross) instead of £30k payment (£37.5 gross). £2k left over is effectively what it will cost you to make an extra £5k of gross contribution in 2017/18 when you're on a 60% marginal tax rate due to loss of personal allowance over £100k.

In 2017/18 you basically have two choices how to make that £5k gross contribution and avoid losing your allowance by keeping your pay to £100k:

-1- Simplest thing to do is just tell your employer you want to sacrifice an extra £5k of salary over that tax year compared to what you were already planning on sacrificing. That way, you don't get paid the £105k, you only get paid the £100k and you don't lose any personal allowance. You also save the 2% NI which you'd have otherwise paid on the £5k salary, which is nice.

But ignoring the small amount of NI, basically by sacrificing £5k of salary you don't pay 40% tax on the £5k, and you don't pay 40% tax on the £2.5k of salary that no longer fits in your reduced personal allowance, so you save £3k tax. It means instead of getting £5k salary and £2k takehome after £3k tax, you just get £5k pension and no tax and no takehome. Losing the £2k take home over the course of the year is fine, because we deliberately held back £2k in the bank account, so you can afford exactly the same "stuff" as if you'd paid the tax and took the £2k takehome.

-2- The alternative way to do it (in your private pension rather than employer sal sac) is just to get to 5 April 2018, realise you have earned a bit too much, and quickly throw £4k into a personal pension at the last minute. Pension company grosses it up to the £5k with £1k basic rate relief.

Do your tax return the next week and HMRC will realise they owe you £2k (because your non-pensioned earnings were now only £100k not £105k so you have overpaid £3k tax and only got back £1k via pension provider gross-up so they must owe you £2k). Takes a couple of weeks to process so you'll probably have the £2k back from your £4k investment by early May 2018 and overall it will have cost you £2k out of your bank. Which is the £2k you deliberately kept back in your bank from your 2016/17 contributions you could have made, as discussed above.

JBmoneysaver

If you do want to put a £37.5k gross into a pension this tax year you are going to have to do it with a private personal pension as described above, because you presumably don't have enough salary left in Feb and March 2016/17 for your employer to be able to knock that salary down by 37.5k and still pay you minimum wage. You don't even earn £10k a month let alone £18k. So presumably you are planning to open up a new private pension with your "lump", right?

I had assumed - that I could make a lump sum contribution to my employer pension over and above the salary sacrifice as I have the cash sitting in a savings account at present. I have been trying to get some answers on what I can and can't do from work and the pension provide. If I can't then yes your spot on with the above comment - thank you

I leave well within my means - been on here so long So I have good cashflow for 17/18 to pay extra into pension and to take my net salary down to improve tax position.

The added little bonus of NI via salary sacrifice - had missed that in my reading tks for the tip.

Thank you - will find out details from current pension on what I can and can't do and take it from there. I might do a combo of both - smaller lump sum this year to cancel CGT and increase Sacrafic next year to avoid losing personal allowance.