40% pension contribution questions

donaldtramp

Hi folks,
Wondering if you could help with my calculations...

I live in Scotland am I'm interested to see how much contributions I can make to a pension to lower my tax bill this year 2017/2018.
I stay in Scotland so the 40% tax rate starts at 43k.
I would if it were possible make pension contributions to totally mitigate the 40% tax level.
Is it as simple as if you were earning 50k (for example) you would have to contribute 7k to a pension to mitigate all the 40% tax rate?
Would a £5600 pension contribution cancel out the 40%? Seeing as 20% is automatically added and you have to claim back the other 20% via tax return?
Is my arithmetic correct here?
I won't know what I'm going to earn until close to year end as my income fluctuates and I'll probably have to make one lump sum payment to a SIPP near the end of the tax year.

On this line of thinking is it possible to make a big enough pension payment so that you don't pay any tax at all? That would be nice!

Also if you go back and use previous years tax allowances to overpay into a pension.... Would these be backdateable at 40% tax rates? How does this work?

Sorry loads of questions! I'm trying to get ahead and make predictions to put money aside for the end of the tax year.

Cheers
DT

arrgee

donaldtramp wrote: »

Hi folks,

I would if it were possible make pension contributions to totally mitigate the 40% tax level.
Is it as simple as if you were earning 50k (for example) you would have to contribute 7k to a pension to mitigate all the 40% tax rate?

On this line of thinking is it possible to make a big enough pension payment so that you don't pay any tax at all? That would be nice!

Also if you go back and use previous years tax allowances to overpay into a pension.... Would these be backdateable at 40% tax rates? How does this work?

Yes. If you earn £50K/annum you can pay £7K away and not pay higher rate tax (nor NI) Also employers can pay their NI 13.8% into your pension.

It is possible to pay all your earnings into a pension and not pay any tax (or NI or emplyers NI) at all. But as you wouldn't use you tax free allowance it makes little sense. So just pay everything over £11.5K

You can go back and use unused allowances. Because of all the changes in recent years use the calculator https://www.tax.service.gov.uk/paac to see what you have available to carry forward. Not backdateable at 40% rates. That tax has gone.

quotememiserable

Yes, it's a simple as that. I've been doing it for some time. Why pay 40% now when you can pay 15% later.

donaldtramp

Thanks for the reply.
So if there were no work pension contributions it would be a straight payment of 7k into a SIPP and claim it back in tax return?
If there were work pension contributions, would I just total the number up on the wage slip over the year and then calculate a figure that when added to the wage slip pension total would bring my salary down to 43k?
Aren't directly paid pension contributions already grossed up by 20%?

Cheers
DT

donaldtramp

quotememiserable wrote: »

Yes, it's a simple as that. I've been doing it for some time. Why pay 40% now when you can pay 15% later.

why 15%?
I thought pension payments were still taxable at normal income tax levels. That is tax free allowance, then standard income tax then higher rate etc?

Linton

arrgee wrote: »

Yes. If you earn £50K/annum you can pay £7K away and not pay higher rate tax (nor NI) Also employers can pay their NI 13.8% into your pension.

It is possible to pay all your earnings into a pension and not pay any tax (or NI or emplyers NI) at all. But as you wouldn't use you tax free allowance it makes little sense. So just pay everything over £11.5K

You can go back and use unused allowances. Because of all the changes in recent years use the calculator https://www.tax.service.gov.uk/paac to see what you have available to carry forward. Not backdateable at 40% rates. That tax has gone.

The NI bit only works if you pay your employment pension under salary sacrifice which is only available if the employer agrees. You putting £7K into a private pension wont affect your NI. If it is done via salary sacrifice you must still be paid Minimum Wage so you cant put all you pay into your pension in this way. If you are paid at Minimum Wage levels you would still be liable for NI.

Linton

donaldtramp wrote: »

why 15%?
I thought pension payments were still taxable at normal income tax levels. That is tax free allowance, then standard income tax then higher rate etc?

For DC pensions 25% of your pension pot is available tax free saving you 20% X 25%=5% tax.

donaldtramp

Thanks Linton.

You can go back and use unused allowances. Because of all the changes in recent years use the calculator https://www.tax.service.gov.uk/paac to see what you have available to carry forward. Not backdateable at 40% rates. That tax has gone.

So it's a case of use it or lose it on the 40% tax rate.
Thanks! learned something tonight.
Thanks for sharing all your knowledge folks!

Cheers
DT

Dazed_and_confused

The op appears to be talking about a personal pension/SIPP type arrangements where basic rate relief is added source so this wouldn't work as it would still leave the op paying £6300 of basic rate tax on £31500 income

It is possible to pay all your earnings into a pension and not pay any tax (or NI or emplyers NI) at all. But as you wouldn't use you tax free allowance it makes little sense. So just pay everything over £11.5K

quotememiserable

Dazed_and_confused wrote: »

The op appears to be talking about a personal pension/SIPP type arrangements where basic rate relief is added source so this wouldn't work as it would still leave the op paying £6300 of basic rate tax on £31500 income

But his net pay will be his gross pay minus his pension payments, so he'd get the rest back when he fills in his tax return, wouldn't he?

Dazed_and_confused

No, a payment into a SIPP or personal pension merely increases the amount of the basic rate tax band i.e. how much income can be taxed at 20%.

It doesn't reduce the amount of taxable income.

A payment deducted from salary before tax does reduce taxable income but that's a whole different beast and is most commonly seen on occupational schemes like teachers pension scheme.