Over £100k confusion on tax & pension & ISA

Roselondon_2

Hi, my husband is new to this concept of over £100k salary. After having read quite some google pages, there are several things really puzzle us.

For example, he makes £110k as basic pay plus £20k as bonus at end of the year (not sure if it's guaranteed).

1. Say, not considering the possible bonus, if he pays every month in the company pension plan (£110k-£99k)/12months = £916.67, would this be sufficient to avoid losing his allowance?

2. I read somewhere that the adjusted income (which the personally allowance is based on) would need to include the portion of pension that company contributed too? Is that really true? If so, wouldn't this defeat the purpose of Point 1?

3. At end of the year, if he really receive that £20k bonus, can it be put into the pension pot in one-go?

4. Does he somehow need to call HMRC each time when there's a fluctuation of events, like the above?

5. After retirement, do people pay tax on their pension when it's taken out from the pot? If so, wouldn't the tax-free nature of the pension when putting in the pot be a little meaningless? Don't get this at all!

4. Does ISA help with cutting tax at the salary pay stage at all? My understanding is that it's only for saving interest free and has nothing to do with pre-tax salary pay. But can't understand why ISA is mentioned everywhere as an alternative to pension.

Any insights would be much appreciated!

Dazed_and_confused

1. Possibly, possibly not. His Personal Allowance is not based on his salary or salary after pension, you need to consider all of his (taxable) income.

2. "Adjusted net income" is all that matters as far as his Personal Allowance is concerned.

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

3. Probably. There may be various options here but whether he pays direct into a company scheme or personal pension/SIPP it is likely to lower his adjusted net income

4. He doesn't have to but if he keeps HMRC informed then his tax code should be more upto date and he will avoid any unexpected tax bills which the files his Self Assessment return.

5. Yes. Often 25% can be taken as a tax free lump sum but the remainder is taxable income just like his current wage.

4. Not seeing how this would happen. Interest from ISA's is tax free but the money put in the ISA in the first place is usually from post tax wages. ISA's can complement a pension but aren't usually seen as an outright alternative, particularly when pensions can benefit from higher rate tax relief.

AnotherJoe

Roselondon wrote: »

5. After retirement, do people pay tax on their pension when it's taken out from the pot? If so, wouldn't the tax-free nature of the pension when putting in the pot be a little meaningless? Don't get this at all!

Lets say you are a high rate taxpayer. You save the 40% tax you would otherwise have paid. In most cases you are likely to be on basic rate tax when you retire and withdraw money, so that means youdve saved 20% tax (40%-20%) but its better than that because 25% is tax free so in fact you pay 15% tax effectively so are gaining 25%.

If you are a basic rate taxpayer its not quite as good but still a win, you save 20% going in and of what comes out, 25% isnt taxed and of the remaining 75% its quite possible not all will be taxed, so the "average" tax you'd pay might be say 10-15%, still less than the 20% you saved going in.

Roselondon wrote: »

4. Does ISA help with cutting tax at the salary pay stage at all? My understanding is that it's only for saving interest free and has nothing to do with pre-tax salary pay. But can't understand why ISA is mentioned everywhere as an alternative to pension.

No. Not in the slightest.

Its mostly mentioned as an alternative by uninformed people who think the tax treatment of pension and ISA works out the same, OR by people who are looking to retire substantially earlier than the age at which they can take money out of a pension.

ChuckMountain

Don't forget there is a maximum of £40k a year that can be paid into your all pensions per year without further tax implications. If the company are paying a matching amount then with the £10k + £10k +£20k bonus that uses that pension allowance up.