Calculating higher rate tax payer optimum additional pension contributions

museumworker

I hope you can help.
My partner earns £68000 pa including taxable car allowance. He also has a taxable benefit of free healthcare, I think they said it was £35pm equivalent. He pays 4.5% into his employers pension which is matched by the employer. Neglible income from savings/investments (under £45 last year).
He also has a bonus which varies each year, the first £3600 is tax free or you can invest it into shares for 5 years then take tax free.

We have three children under 18, he gets the max childcare vouchers for the post April 2011 scheme (£124).
We are considering upping his pension contributions to take him to a sub £50k taxable income.

Can anyone advise how I should calculate this? I'm wondering if his bonus will be counted as taxable income if we put it straight in shares?

Thanks in advance!

AnotherJoe

I think he should up his pension contributions to enable him to have an adequate pension !

Cygnus_Alpha

museumworker wrote: »

I hope you can help.
My partner earns £68000 pa including taxable car allowance. He also has a taxable benefit of free healthcare, I think they said it was £35pm equivalent. He pays 4.5% into his employers pension which is matched by the employer. Neglible income from savings/investments (under £45 last year).
He also has a bonus which varies each year, the first £3600 is tax free or you can invest it into shares for 5 years then take tax free.

We have three children under 18, he gets the max childcare vouchers for the post April 2011 scheme (£124).
We are considering upping his pension contributions to take him to a sub £50k taxable income.

Can anyone advise how I should calculate this? I'm wondering if his bonus will be counted as taxable income if we put it straight in shares?

Thanks in advance!

So let's start with the £68,000. His pension contribution of 4.5% is usually not applied to the car allowance. So let's say his car allowance is say £4,000, you need to deduct 4.5% of £64,000.

Then it should be straightforward he calculate how much he needs to pay in to take his taxable to below £50k.

I'm assuming we can ignore childcare vouchers if he is being taxed on a benefit in kind.

I would wait until he receives his bonus before deciding how much of it to put into a pension.

museumworker

AnotherJoe wrote: »

I think he should up his pension contributions to enable him to have an adequate pension !

He has only ever paid small amounts into his private pensions so this will help address this issue whilst also still giving us a take home pay we can manage on and making the most of the tax benefits.

Cygnus_Alpha wrote: »

So let's start with the £68,000. His pension contribution of 4.5% is usually not applied to the car allowance. So let's say his car allowance is say £4,000, you need to deduct 4.5% of £64,000.

Then it should be straightforward he calculate how much he needs to pay in to take his taxable to below £50k.

I'm assuming we can ignore childcare vouchers if he is being taxed on a benefit in kind.

I would wait until he receives his bonus before deciding how much of it to put into a pension.

Thanks so much for your reply.

I had no idea about the 4.5% not being calculated on the car allowance part of his income, that is very helpful.

I'm not very clear on the childcare vouchers, they are tax free so unsure if these would also reduce his taxable income.

Dazed_and_confused

Is he able to increase the 4.5% contributions or are you thinking of a SIPP/personal pension?

jkwer521

Why is the first £3,600 of the bonus tax free? I've never heard of anything like that before

museumworker

Dazed_and_confused wrote: »

Is he able to increase the 4.5% contributions or are you thinking of a SIPP/personal pension?

Yes, he can increase his contribution above 4.5% it just won't be matched. I thought we would just pay into his employer's pension scheme to avoid complicating matters but completely open to alternative perspectives.

jkwer521 wrote: »

Why is the first £3,600 of the bonus tax free? I've never heard of anything like that before

The government now gives tax free status to the first £3,600 of staff bonuses at employee-owned companies.

xylophone

http://www.pruadviser.co.uk/content/knowledge/technical-centre/child_benefit_trap/

https://www.gov.uk/guidance/adjusted-net-income

http://www.scottishwidows.co.uk/Extranet/Literature/Doc/FP0491

Dazed_and_confused

Yes, he can increase his contribution above 4.5% it just won't be matched. I thought we would just pay into his employer's pension scheme to avoid complicating matters but completely open to alternative perspectives.

In your op you said,

We are considering upping his pension contributions to take him to a sub £50k taxable income.


If extra pension is into employers scheme and is taken before tax then that will reduce taxable income, for example,

Salary 60000
Pension 6000
Taxable pay 54000

But if the extra is paid into a SIPP then it won't reduce taxable income at all. Basic rate tax relief will be given at source so the contribution will be topped up within the pension fund but that has no bearing on taxable income, any higher rate tax relief is given by the gross SIPP contribution increasing the amount partner can pay basic rate tax on this reducing the amount taxed at higher rates.

The SIPP payment would reduce adjusted net income which can be of benefit to those earning over £100k or who might be liable to pay the high income child benefit charge but this is entirely different to reducing taxable income.

Not advocating either method just not sure one will achieve what you stated in your op.

museumworker

Dazed_and_confused wrote: »

Yes, he can increase his contribution above 4.5% it just won't be matched. I thought we would just pay into his employer's pension scheme to avoid complicating matters but completely open to alternative perspectives.

In your op you said,

We are considering upping his pension contributions to take him to a sub £50k taxable income.


If extra pension is into employers scheme and is taken before tax then that will reduce taxable income, for example,

Salary 60000
Pension 6000
Taxable pay 54000

But if the extra is paid into a SIPP then it won't reduce taxable income at all. Basic rate tax relief will be given at source so the contribution will be topped up within the pension fund but that has no bearing on taxable income, any higher rate tax relief is given by the gross SIPP contribution increasing the amount partner can pay basic rate tax on this reducing the amount taxed at higher rates.

The SIPP payment would reduce adjusted net income which can be of benefit to those earning over £100k or who might be liable to pay the high income child benefit charge but this is entirely different to reducing taxable income.

Not advocating either method just not sure one will achieve what you stated in your op.

I'm not quite sure I understand this, but reading through I suppose our intention, aside from building his pension fund, is to reduce his adjusted net income to just under £50K.

museumworker

museumworker wrote: »

I hope you can help.
My partner earns £68000 pa including taxable car allowance. He also has a taxable benefit of free healthcare, I think they said it was £35pm equivalent. He pays 4.5% into his employers pension which is matched by the employer. Neglible income from savings/investments (under £45 last year).
He also has a bonus which varies each year, the first £3600 is tax free or you can invest it into shares for 5 years then take tax free.

We have three children under 18, he gets the max childcare vouchers for the post April 2011 scheme (£124).
We are considering upping his pension contributions to take him to a sub £50k taxable income.

Can anyone advise how I should calculate this? I'm wondering if his bonus will be counted as taxable income if we put it straight in shares?

Thanks in advance!

New info... His salary is £68100 pa
He has a car allowance of £240pm on top (= £2880pa) He is convinced it is not taxed :question:but I think it will be counted towards his net income.
He pays £255.38 pm into the pension (4.5% of salary) = £3064.56pa
He has childcare vouchers of £124 pm = £1488pa.
He has the taxable benefit of healthcare (which I believe is £35 pm = £420pa)

Here goes my attempt to work it out...

Current taxable income = £68,100 (salary) + £2,880 (car allowance) + £420 (healthcare scheme) = £71,400.
MINUS £1,488 (childcare voucher) + £3,064.46 (pension ) = £66,847.54

To get to £50K he would need to contribute an additional £16,847.54 pa to his pension = £1,403 pm

Correct?
And the difference in his take home pay for that would be from £3,604.66 to £2,790.92 (using http://www.thesalarycalculator.co.uk/salary.php) which is £813.74

Let me know if I've got the wrong end of the stick!