Calculating how much AVC to pay to reduce Adjusted Net Income

Th3_Ripper

Hello,

I am looking for some guidance.

I recently became aware of the need to pay the child benefit tax charge and have completed the relevant forms to complete a self assessment. My salary only just went over the threshold so this is the first year I will owe money - thankfully


I have read a number of articles that describe if I increase my pension contributions I may be able to reduce the charge.


I am trying to work out how much I need to pay to remove the charge altogether or at least where the "sweet spot" is, but I am struggling to understand if I should be including/excluding tax relief.


My ANI is £57,608 but I also have a P11d value of £810 due to medical insurance so perhaps I need to include this in addition to the £57,608?


Do I need to make AVCs of £7,608 or £4,654 (60% of £7,608)?


Or am I miles away in my understanding of this situation?

I found this advice/guidance within an article on unbiased.co.uk:
Your ANI would be reduced by the grossed up pension contribution. Thus if your ANI before the contribution was £60,000, making a net pension contribution of £8,000 would, gross up to a £10,000 deduction in your ANI to £50,000. In addition to wiping out the child benefit tax charge, you would also qualify for higher rate income tax relief of 40 per cent on the contribution.

I am not sure what they are meaning by "reduced by the grossed up pension contribution"?

Any help would be gratefully appreciated - it really really would!


Thank-you

Dazed_and_confused

Could you possibly explain which tax year you are referring to?

You start by saying you have registered for Self Assessment and quote very specific income figures and also mention a P11D. This all suggest 2017:18.

But then you talk about how much extra pension payments you need to make.
Which isn't possible for 2017:18.

Confusing.

Th3_Ripper

Sorry I should be clear. I will owe a tax charge for 2017/2018 and have completed the relevant forms and will make the relevant payment (approx. £1,000).

I am now looking to reduce my liability for the current 2018/19 tax year and subsequent years.

Thank-you, I should have made this clear.

Dazed_and_confused

Before you do anything else you need to find out what type of pension contribution you will be making.

With AVC's I think there are 3 possibilities,

1. Lump sum payment not via payroll so no tax relief received when payment is made
2. Payment from wages which reduce taxable pay i.e. salary £50,000 less 5% pension = £47,500 taxable salary (P60 pay figure)
3. Payment to pension company where they add basic rate relief i.e. you pay them £4,000 and they add £1,000 tax relief making a gross contribution of £5,000

And yes, you need to include any company benefits. And any savings interest you receive (apart from genuine non taxable things like ISA's).

Th3_Ripper

It will be a payment from wages into my existing company pension.

Dazed_and_confused

That sounds like you will need to pay about £8.4k in extra contributions.

Assuming your adjusted net income ignoring the additional contribution is about £58.4k (£57.6k + £0.8k).

You will get tax relief via a reduction in the tax you pay on your salary i.e. your taxable salary will be reduced by £8.4k saving you about £3.3k based on what you've posted so far.

Th3_Ripper

Thank-you that is a huge help.

While I would love to be in a position to put that straight into a pension, huge tax benefit (forgetting about the CB tax charge for a second) I don't think I can afford the salary reduction.

Looks like it would make more sense to forego the child benefit.

I am now trying to work out whether a tapered approach would be affordable.

michaels

Th3_Ripper wrote: »

Thank-you that is a huge help.

While I would love to be in a position to put that straight into a pension, huge tax benefit (forgetting about the CB tax charge for a second) I don't think I can afford the salary reduction.

Looks like it would make more sense to forego the child benefit.

I am now trying to work out whether a tapered approach would be affordable.

The maths should be quite straightforward as between 50k and 60k the impact of pension tax relief and child benefit withdrawal are both linear.

However the marginal tax rate payable can be pretty painful if like us you have 3 kids so you might be better off for example extending your mortgage term/switching to IO so you can afford the pension payments to bring your salary down to 50k.

xylophone

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/reduce-high-income-child-benefit-charge/

Kynthia

Work out how that £8.4k contribution would affect your take home pay. You would be paying 40% tax on that money so would only receive 60% of it if you didn't put it in your pension. Does your employer take your pension contributions by salary sacrifice or just from gross pay, as if it's the former you are saving the 2% NI that would be deducted? Then deduct the child benefit you are giving up.

Yet if you made that contribution you would not only keep the child benefit you would also have that money in a pension for your future.

Th3_Ripper

Hello,

Firstly, thank-you for all of the replies it has been really interesting to hear people's opinions and suggestions.

The variance between ANI and the 50k threshold is £8,418.

Kynthia, is it as simple as removing 40% off the value of £8,418? If I am correct that reduces the amount of forfeited take home pay to £5,050?

You are of course right to highlight that I would also benefitting from keeping the CB, worth £1,788 per year.

If my numbers are correct (big if ) my take home pay would be £3,262 less per year.

Does that sound right?