Over £100k - Pension payment conundrum

Mrmojorisin2000

Hi,

This year I am fortunate enough that I am going to earn over a £100k with a Bonus i'm going to receive in March.

I am aware of the 60% effective rate of tax in the bracket £100k to £123.7k, and that the most tax efficient thing to do would be to pay my bonus into my pension.

Lets say I currently earn exactly £100k and will receive a £10k bonus in March.

The problem I have is my bonus will get taxed at 40% in the normal way through my payslip so my net pay will only increase by £6k (Ignoring NI) If I pay the full £10k into a pension it will just about make my take home pay for the month zero.

So although I want to pay my Bonus into my pension I cant afford to do it.

Have I got the above correct ?

Thanks

M.

BoGoF

Is this a personal pension or employers scheme?

Dazed_and_confused

I'm assuming you mean you can't afford it out of the salary/bonus payment.

Another option would be to make a personal pension contribution out of other funds.

Using your example you could pay £8k into a personal pension and the pension company would add £2k basic rate tax relief so you have £10k in the pension fund.

This does not reduce your taxable income whatsoever but it does reduce your "adjusted net income", which is what your Personal Allowance is based on.

It also increases the amount of basic rate tax you can pay so reducing the higher rate tax payable.

Overall it might save you £4k in tax by a combination in the reduction of higher rate payable and keeping some of your Personal Allowance so you end up with £10k in your pension fund which has ultimately only cost you £4k.

You still have to pay out £8k in the next few weeks but it will save you money further down the line.

Any tax relief due for 2018:19 will form part of your Self Assessment calculation in due course.

Mrmojorisin2000

Yes its a company pension scheme that AVC's can be made to.

Cant afford it as in :

Say my normal monthly salary is £5k net, with the Bonus paid through salary I would pick up £11k in the month of March, but if I pay the full £10k in to a pension I'm left with only £1k for the month.

There doesn't appear to be a way to do this without releasing other savings and waiting until later in the year to get a tax refund from Self Assessment.

Thanks,
M

[Deleted User]

You haven’t grasped that you ‘only’ need to fund £8000 in order to reduce your taxable income by £10000, the £2000 being added by HMRC as previously explained.

I realise that this could still mean that it is unaffordable.

DoctorStrange

Probably an obvious point but have you checked there's no definitely no salary sacrifice options available?

Mrmojorisin2000

Thanks for the replies.

I think I will have to put as much of the after tax money through salary as I can afford into pension, and except that I'm going to get taxed at 60% on the remainder.

You work all your life to earn a £100k and when you get there its just a big slap in the face.!

unkle

It's actually 62% as you will also pay 2% NI.


On your calcs if you want to avoid 60% tax you have to pay in £8k and then reclaim the rest on your tax return in a month or so time.


If you have other savings use that to top up your monthly money in the interim.

londoninvestor

DoctorStrange wrote: »

Probably an obvious point but have you checked there's no definitely no salary sacrifice options available?

Or if not salary sacrifice, can you get a contribution into the employer scheme directly from the bonus paid to you? (i.e. it's a deduction from your payslip in the same pay period as you get your bonus).

Where I worked, we could nominate in advance that we wanted the first £Xk of bonus to be paid directly into our pension - not all employers will necessarily facilitate that though.