Cutting Income Tax

Mr.Saver

My situation is very simple. I'm an employee of a company that doesn't offer pension salary sacrifice scheme. I pay 40% tax on my income. What options do I have?

00ec25

simple answer: start a private pension or pay into the company's non sacrifice scheme

xylophone

Are you already contributing to the company's scheme?

If so, is the scheme Relief at Source or Net Pay?

https://www.gov.uk/workplace-pensions/managing-your-pension

Berkshire_Beancounter

I'm sure there are many folk out there who can confirm my understanding, but I thought the main benefit of salary sacrifice scheme for pension contributions was to reduce national insurance contributions; you should get tax relief (subject to not breaching the annual and lifetime allowances) if you contribute to a workplace pension whether through salary sacrifice or straightforward deduction from gross salary.

Off the top of my head my ideas are pretty basic:

- if you have any savings, make sure they are in ISAs (or premium bonds, depending on your preferences as winnings from these are tax free, although not guaranteed) - although as a higher rate taxpayer the first £500 of interest would not be subject to tax anyway.
- if you make any charitable donations, make sure you gift aid them and include that amount on your tax return.
- if you can afford it, consider making additional contributions to your pension either through AVCs in your company scheme, if offered, or a SIPP (again subject to not breaching the annual or lifetime allowances). This assumes you can afford not to have access to the money until age 55 at the earliest.
- if your company offers flexible benefits (a former employer of mine used to, but I guess that is not common) then most of the benefits offered are usually taxable but annual leave isn't.

Linton

Mr.Saver wrote: »

My situation is very simple. I'm an employee of a company that doesn't offer pension salary sacrifice scheme. I pay 40% tax on my income. What options do I have?

Sadly it is a key feature of our tax system that earned income is taxed at a higher rate than income from investments and the opportunities for tax avoidance are much more limited. So an effective way to pay less tax on your income is to to increase the % of it that is unearned. Perhaps by retiring as soon as you can afford it or employing yourself through your own limited company.

Mr.Saver

xylophone wrote: »

Are you already contributing to the company's scheme?

If so, is the scheme Relief at Source or Net Pay?

https://www.gov.uk/workplace-pensions/managing-your-pension

Yes, I'm contributing to the company's pension scheme, it's Relief at Source.

But this isn't good enough. As a higher rate tax payer, for every £100 I earned in the HR tax band, I pay £40 tax, and end up with £60 in my pocket.

If I pay all of the £60 into my pension, the pension provider would automatically add £15 to it, which is 20% of the gross contribution. This gives me £75 in the pension.

Then I can claim a further 20% tax relief on the £75 gross contribution I paid into the pension from Self Assessment at the end of the tax year, this gives me another £15.

So, in short, I earned £100 pre-tax salary, and paid them all into my pension. At the end, I would only have £90. 10% of my hard earned money is gone. If I was using a salary sacrifice scheme, 100% of the £100 will be paid into my pension.

Mr.Saver

Linton wrote: »

Sadly it is a key feature of our tax system that earned income is taxed at a higher rate than income from investments and the opportunities for tax avoidance are much more limited. So an effective way to pay less tax on your income is to to increase the % of it that is unearned. Perhaps by retiring as soon as you can afford it or employing yourself through your own limited company.

I'm far away from retiring age, so I'm afraid I still need to pay the income tax for decades.
For the limited company, I will lose my holidays and also my employer's soon to be 3% pension contributions, it needs to be carefully planed and calculated.