Lump sum into SIPP to reduce marginal tax

karie

Hello all and apologies as I know this query will have been asked before but I didn't want to add to another or old thread.

Due to a promotion and bonus payment I will earn over £100k this year unexpectedly, I appreciate this is a nice problem to have but I am also keen to reduce the marginal rate of tax I'm paying if possible so I was hoping someone would help to check my logic and see if I've misunderstood anything.

Total taxable income incl bonus: £122k

(1) My first question is whether I have understood the tax allocations and how the tax free allowance is removed correctly?

(a) the TFA reduces to £850 ((11850-(22000/2)=525) therefore £850 of income @ 0% - however I have a taxable benefit of £590 so therefore I'm assuming my TFA reduces practically to zero (for ease of calc have assumed 0 rather than £260)
(b) All income up to £46350 @ 20%, therefore £9270
(c) All other income @ 40%, therefore £75,650@40%= £30,260
=(d) Gets to an overall total of £39,530




(2) My second question is whether I have correctly understood how my tax payments would change if I paid £22k into my pension?

(a) TFA re-instated, apart from the taxable benefit, therefore £11260 is tax-free
(b) Tax @ 20% on £34.5k, therefore £6.9k
(c) Tax @ 40% on remaining income, therefore £53,650@40%= £21,460
= (d) Gets to an overall total of £28,360 therefore reducing tax paid by £11,170




(3) If I have understood this correctly then this seems a very logical thing to do, however then my third question (and this is where I'm most unsure!) is how the payments work:

I will already have paid £5k into my pension this year from gross salary. There will also have been added to by my employer so contributions in total are £17.5k. If I put £22k lump sum into pension I am assuming this is okay because total pension contributions are then £27.5k from me and £12.5k from employer.

If I pay in £22k, have I understood correctly that the govt tops this up further by 25% (£5.5k), and I can also claim 20% relief through my self-assessment (£4.4k)?
Presumably however though I need to pay in the actual £22k and reclaim the £4.4k (not £22k-£5.5k=£16.5k) as if I pay any less then I still remain in the marginal tax bracket? Reason for that question is that £22k is a significant amount of money so I am trying to see if I can afford to put it in versus paying the extra tax but keeping the cash available for other expenses.

All advice really appreciated and apologies in advance for any obvious errors..

Dazed_and_confused

Your Personal Allowance isn't based on your taxable income. It is calculated based on something called "adjusted net income" which is explained on gov.uk.

But if we assume your adjusted net income is in fact £122,000 then yes your Personal Allowance would be £850. A benefit in kind (which i presume you have included in the £122k) is only deducted from this for the purpose of calculating your tax code. But a tax code is just a provisional attempt by HMRC to get you to pay the correct amount of tax during the year.

You need to think about the actual calculation of your liability and this has a few dependencies.
Which are you resident for tax purposes in 2018:19?
What is the £122k income made up of - different types of income have different tax rates

I will already have paid £5k into my pension this year from gross salary.

This is probably irrelevant to your tax calculation then as you would have taxable income of £127k but this is now just £122k because of this pension contribution. Is this correct?

If I pay in £22k, have I understood correctly that the govt tops this up further by 25% (£5.5k), and I can also claim 20% relief through my self-assessment (£4.4k)?

No. There is no extra pension tax relief of 20% (or any other %). A pension contribution with relief at source simply increases the amount of basic rate tax you can pay. Which in turn reduces the amount of higher rate tax you might need to pay. So it could be 20% extra relief but it isn't 20% simply because the higher rate is 40% and basic rate 20%.

So can you say what your adjusted net income is?
And what this is made up of, taxable salary/benefits, savings interest, dividends, rental income etc etc

karie

Dazed_and_confused wrote: »

Which are you resident for tax purposes in 2018:19?
What is the £122k income made up of - different types of income have different tax rates

you would have taxable income of £127k but this is now just £122k because of this pension contribution. Is this correct?


So can you say what your adjusted net income is?
And what this is made up of, taxable salary/benefits, savings interest, dividends, rental income etc etc

Hello and thank you.
I was/am resident in the UK.

My taxable income is £127k, made up of base salary, bonus, car allowance and rental income, also I have added on the taxable benefit.
My pension of £5k got me to the figure I called taxable but I believe is adjusted net income based on the gov.uk description, so £122k

Re: the tax relief... that makes more sense. So it's not a payment as such, just increases the tax I pay @ 20% rather than 40%

Dazed_and_confused

So adjusted net income of £122k would give a Personal Allowance of £850.

Remember your proposed pension contribution is going to be relief at source, not the net pay one of £5k you have already made. So you will be taxed on the full £122k but your basic rate band would be increased by by £27,500 if you made a qualifying payment into a relief at source scheme.

This would bring your adjusted net income down to less than £100k

First £11,850 is covered by Personal Allowance
Next £62,000 is taxed at basic rate
Final £48,150 is taxed at higher rate

As you aren't Scottish resident for tax purposes and don't have any savings interest or dividend income it is fairly straightforward, you just have the basic and higher rate to worry about!

I presume you are aware of the landlord loan interest relief rules - there may be a tax credit available to deduct from your tax liability depending on your finance costs and rental income profit. And any tax deducted under PAYE during the year of course.

karie

How do I arrive at the £62k figure, trying to work it back?


I have about £400 interest/divs also which I declare on SA but I believe covered within the dividends / interest allowances, am I right there?


Hmmm I will google the landlord loan interest relief rules and make sure I have understood this
I apply the % now allowed on loan interest of mortgage plus remove relevant expenses etc (though over last few years there appears to be less and less you can include as an expense..)

karie

ahhh.. £34.5k + (£22k*1.25) = £62k... thank you

Dazed_and_confused

How do I arrive at the £62k figure, trying to work it back?

£34,500 basic rate band plus £27,500 gross relief at source pension contribution.

I have about £400 interest/divs also which I declare on SA but I believe covered within the dividends / interest allowances, am I right there?

There are no "allowances" for savings interest or dividends. Earlier in the thread you said your taxable income (before the £5k net pay pension contribution) was £127k. Is it £127,000 or is it £127,400?

Roughly how is the £400 split between interest and dividends.

Note the calculation in my previous post is now wrong.

Hmmm I will google the landlord loan interest relief rules and make sure I have understood this
I apply the % now allowed on loan interest of mortgage plus remove relevant expenses etc (though over last few years there appears to be less and less you can include as an expense..)

For the purpose of this thread it is your taxable rental income profit which counts. Have you estimated this correctly in the £127k or does this need changing?

The tax credit you may be eligible be for is a tax reduced i.e. it gets knocked off your final tax liability, it doesn't form part of the basic calculation.

karie

Ah okay I've clearly misunderstood more than a few things...! £102 dividends, £297 interest. I will add this onto the £127k and adjust for the purpose of the tax calculation

The rental income I included in the adjusted net income was the profit figure associated with the rental property, net of allowable expenses

Dazed_and_confused

If you are paying the £27.5k pension contribution your adjusted net income will be low enough still tio get the full Personal Allowance still.

The savings interest will be taxed at 0% (savings nil rate, aka Personal Savings Allowance)

The dividends will be taxed at 0% (dividend nil rate, aka Dividend Allowance)

Overall probably doesn't make much, if any difference but you do need to consider the whole picture to get the right end result

karie

Hi again dazed and confused

Could I ask you another question?

I have read conflicting information about the amount I should pay in as my pension contribution.

I am unclear if I should be paying £22k which becomes £27.5k... or if I should be paying £17.6k which becomes £22k

I have left a call with FA to verify but also appreciate your clarification

Objective being to retain the TFA therefore falling below £100k threshold...

Thanks again

Dazed_and_confused

As a MSE user why are you using a FA?

Have you considered trying an IFA?

Anyhow perhaps you could recap your taxable income in 2018:19?

I don't think either figure is correct. £27.5k is too high from what you've previously posted but £22k is too low because you have got new sources of income not originally disclosed.

Step 1 is to calculate your adjusted net income, taking into account everything expect a future pension payment. Then you will know what you need to pay.