A Flat Rate of Tax Relief?

edited 30 November -1 at 1:00AM in Pensions, Annuities & Retirement Planning
120 replies 15K views
16781012

Replies

  • MistermeanerMistermeaner Forumite
    2.9K Posts
    Seventh Anniversary 1,000 Posts
    ✭✭✭✭
    Scheme pays applies to dc out of the individuals pot and there for at individuals cost, it's Admin only i think (waits to be corrected )

    How db works with the various changing limits needs looking at fully

    Any police officer accruing a 25k per annum pension over 30 years (tgheres lots) is in effect benefiting from a pot worth 600k - 800k or more

    That's 20k+ a year tax free to accumulate so should be treated same as dc contributions

    Current calcs value the pot at only 500k so greatly mask true cost and benefit
    Left is never right but I always am.
  • EdSwippetEdSwippet Forumite
    1.3K Posts
    Seventh Anniversary 1,000 Posts Name Dropper
    ✭✭✭
    Scheme pays applies to dc out of the individuals pot and there for at individuals cost, it's Admin only i think (waits to be corrected )
    Thanks. Corrected prior post. The double-tax works out the same in both cases.
  • michaelsmichaels Forumite
    25.8K Posts
    Part of the Furniture 10,000 Posts Name Dropper
    ✭✭✭✭✭
    Consider a BR taxpayer who can sal sac and get 10% of employers NI added to sal sac by employer.

    Pay 10k of gross into pension over annual allowance, employers NI makes this 11k in pension. TFLS plus basic rate on drawdown means 11k is worth £9350 gross. 11k pension contribution over annual allowance with 20% 'tax credit' removed requires a payment on tax return of £1833. £9350 less £1833 = £7516.

    Take 10k income and pay 20% tax and 12% NI is worth £6800 gross.

    So with sal sac and (most of) employers NI it is still better for a BR taxpayer to exceed the AA if they can afford the hit to current disposable.

    Are my sums right?

    How about for a higher rate taxpayer, is the tax charge 40% rather than 20% for pension contributions over the AA?
    I think....
  • ThrugelmirThrugelmir Forumite
    84K Posts
    Part of the Furniture 10,000 Posts Name Dropper Photogenic
    ✭✭✭✭✭✭
    Employers National Insurance is at a higher rate than 10%. Currently 13.8%.

    Is your employer also making a saving on your salary sacrifice?
    It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong." — George Soros
  • michaelsmichaels Forumite
    25.8K Posts
    Part of the Furniture 10,000 Posts Name Dropper
    ✭✭✭✭✭
    Thrugelmir wrote: »
    Employers National Insurance is at a higher rate than 10%. Currently 13.8%.

    Is your employer also making a saving on your salary sacrifice?

    Yes, for me I get 10%, they get the rest, other proportions are available, if you get 13.8% it makes the calc even more favourable.

    If you owe more than 2k tax I believe it can be taken from the pension rather than having to be paid on the tax return.

    (All aussimg BR taxpayer) I am unsure how the tax on over AA payment is calculated - is it 20% of all over allowance payments or is it calculated as if the overpayment includes 20% tax relief and this is reclaimed (in which case it is only one sixth / 16.67%)?
    I think....
  • edited 19 October 2018 at 12:16PM
    zagfleszagfles Forumite
    17.4K Posts
    Tenth Anniversary 10,000 Posts Name Dropper Chutzpah Haggler
    ✭✭✭✭✭
    edited 19 October 2018 at 12:16PM
    michaels wrote: »
    Yes, for me I get 10%, they get the rest, other proportions are available, if you get 13.8% it makes the calc even more favourable.

    If you owe more than 2k tax I believe it can be taken from the pension rather than having to be paid on the tax return.

    (All aussimg BR taxpayer) I am unsure how the tax on over AA payment is calculated - is it 20% of all over allowance payments or is it calculated as if the overpayment includes 20% tax relief and this is reclaimed (in which case it is only one sixth / 16.67%)?
    The excess is added to taxable income and taxed at marginal rate(s), so possibly getting pushed into a higher tax band. It basically removes the tax relief.

    See here:

    https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm056110
  • michaelsmichaels Forumite
    25.8K Posts
    Part of the Furniture 10,000 Posts Name Dropper
    ✭✭✭✭✭
    zagfles wrote: »
    The excess is added to taxable income and taxed at marginal rate(s), so possibly getting pushed into a higher tax band. It basically removes the tax relief.

    See here:

    https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm056110

    This makes the £1883 in my calc above £2200 and the total net value of the 10k sal sac pension contribution £7150, still a little more than the £6800 net if it is taken as taxable income.

    If the employer gives the employee the whole 13.8% employers NI saving the figures are SS £7397 and taxed income £6800 or about 9% more.

    As above assumes all income is in BR tax band both now and at pension drawdown.
    I think....
  • edited 19 October 2018 at 1:08PM
    EdSwippetEdSwippet Forumite
    1.3K Posts
    Seventh Anniversary 1,000 Posts Name Dropper
    ✭✭✭
    edited 19 October 2018 at 1:08PM
    michaels wrote: »
    This makes the £1883 in my calc above £2200 and the total net value of the 10k sal sac pension contribution £7150, still a little more than the £6800 net if it is taken as taxable income.
    When comparing, are you factoring in that to have the money to pay the £1833, £2200 or whatever tax on the pension contribution would require additional earnings of £2844, £3793 and so on?
  • michaelsmichaels Forumite
    25.8K Posts
    Part of the Furniture 10,000 Posts Name Dropper
    ✭✭✭✭✭
    EdSwippet wrote: »
    When comparing, are you factoring in that to have the money to pay the £1833, £2200 or whatever tax on the pension contribution would require additional earnings of £2844, £3323 and so on?

    Interesting thought, I have the money available via existing savings which I will replenish from the tfls/drawdown so money effectively taxed at 15% but do I need to add that 15% to the cost side again or is it already included in the calculation?

    (We will assume that the savings would be in an isa so grow in the same tax free manner as the money in the pension wrapper)
    I think....
  • EdSwippetEdSwippet Forumite
    1.3K Posts
    Seventh Anniversary 1,000 Posts Name Dropper
    ✭✭✭
    michaels wrote: »
    Interesting thought, I have the money available via existing savings which I will replenish from the tfls/drawdown so money effectively taxed at 15% but do I need to add that 15% to the cost side again or is it already included in the calculation?
    It depends what comparison you are making I suppose, but one valid one would be the pre-tax cost of extracting a given sum from a pension versus the pre-tax cost of obtaining the same sum out of earnings now and without using a pension. To make that comparison would require you to consider the pre-tax cost of your £11k pension amount (made up of £10k contribution and £1k sal-sac uplift by employer) to be, say, £10k plus whatever you need to earn (or otherwise consume pre-tax), to leave you £1,833 or whatever to pay the extra tax on the contribution.

    Or, if comparing post-tax output for a given pre-tax input, you would need to lower the pension contribution by an amount that once taxed (and perhaps also NI-ed) is enough to pay the extra tax on that level of contribution.
This discussion has been closed.
Latest MSE News and Guides

17 Netflix hacks

Cut costs & get more from your subscription

MSE Guides

Beauty Advent calendar round-up

Incl M&S calendar release date

MSE Deals