Tax

shanea

Hi all, I have hypothetical questions:

If I earn £26000 per year I pay £5200 tax

If I put all this £26000 per year into my workplace pension I get all the £26000 into the pot?

So, in 4 years I would have £104000 in my pension pot? (and less personal savings left lol)

If I decide to leave work at 55 and rely only on this pot, no other income, if I draw £12000 per year do I pay tax on it?

Or is it not as simple as this?

Thanks in advance

HappyHarry

shanea wrote: »

Hi all, I have hypothetical questions:

If I earn £26000 per year I pay £5200 tax

If I put all this £26000 per year into my workplace pension I get all the £26000 into the pot?

You would pay £20,800 into your pot and your pension provider would claim the other £5,200, making a total of £26,000 in your pension.

shanea wrote: »

So, in 4 years I would have £104000 in my pension pot?

If your pension saw zero growth, zero falls and zero charges, then yes. In reality, your pension fund will fluctuate in value and have charges taken from it.

shanea wrote: »

If I decide to leave work at 55 and rely only on this pot, no other income, if I draw £12000 per year do I pay tax on it?

Or is it not as simple as this?

It is almost as simple as that.

You wouldn't pay tax. 25% of this £12,000 would be tax-free, and the remaining £9,000 would be taxable. As your personal allowance is £12,500 per year, and you have no other income, the £9,000 income won't attract any tax.

shanea wrote: »

Thanks in advance

You're very welcome.

BoGoF

If your thoughts were that you would not pay tax if you paid it all into a pension scheme then that plan will not work. If your employer offers salary sacrifice then you cannot sacrifice below minimum wage.

Paul_Herring

shanea wrote: »

Hi all, I have hypothetical questions:

If I earn £26000 per year I pay £5200 tax

No, you pay £2698.20 tax and £2084.16 NI for total deductions of £4782.36

If I put all this £26000 per year into my workplace pension I get all the £26000 into the pot?

If salary sacrificing, you can't sacrifice below minimum wage (£14778 based on 37.5 hrs over 48 weeks.)
So on the basis you'll contribute after tax pay and will get 20% tax back on the amount so you contribute £20800.

This ignores any employer contributions.

If I decide to leave work at 55 and rely only on this pot, no other income, if I draw £12000 per year do I pay tax on it?

You're forgetting the tax free allowance (as you did for your first calculation,) which this year is £12,500, so while the £12,000 is taxable, it won't actually be taxed since it's below the TFA. On top of that, 25% of your pension withdrawls don't attract tax anyway.

Linton

The OP doesnt mention salary sacrifice.. If SS was relevent you could pay the minium wage bit into a private pension. Also if it was an employer pension and the contribution was made before tax then the OP would pay in the full £26K. There would be £26K + employers contribution in the OPs pension and nothing in his pocket



In this latter case one isnt making full use of the tax position. Better to pay sufficient into the employers scheme to get the maximum employers contribution. Then pay 80% of the rest into a personal pension which HMRC will make up to 100% as a tax refund. In this way the OP ends up with £26K + employers contribution in his pensions and 20% of his private contribution in his pocket.


But back to the OP's real question: Yes you are correct, you could end up with getting all your wages tax free. The complication is exactly how you put all your wages into a pension, it is not necessarily 100% obvious

shanea

Thanks everyone. Just to confirm I'm not part of any salary sacrifice.

I have an appointment with a Pensionwise person today which I will hopefully discuss this scenario

OldBeanz

A few other figures for the mix:
You can take out your personal allowance + 25% tax free each year if you have no other income (less £1k interest which is not counted). So at the moment you can take £12.5k plus £4.125k without paying tax.
You could take 25% as a tax free lump sum on day 1 then your personal allowance thereafter each year.

AnotherJoe

Yeh, to keep it simple I took 25% lump sum upfront and then PA each year.

No taxable income for a few years so no tax. get as much out taxfree before SP and a work pensionkicks in.

Bagenz

Paul you state
If salary sacrificing, you can't sacrifice below minimum wage (£14778 based on 37.5 hrs over 48 weeks.)
So on the basis you'll contribute after tax pay and will get 20% tax back on the amount so you contribute £20800.

Gov web page backs this up, just not sure how thisworks is SS the same as AVC and if I have been paying into my pension do these rules still apply, seems weird by changing minimum wage I should be forced to change my contributions
I was unaware of this, a few days ago I dropped my wage to £14,244 as my taxcode is s1375m I would be paying next to nothing in tax, the lower wage now entitles me tomore in tax credits making up what I lose.
Now this is sitting as pending and im assuming it will go through. I was under the impression that
This statement was true.
Paying additional voluntary contributions
You can pay as much or as little as you like into your AVC pension as long as you don’t exceed the pension contribution limit, which applies to all of your pensions. For 2019/20 this limit is set at 100% of your income, with a cap of £40,000.
Now my wage was just over 30k and I work 37.5 hours per week, If somebody can confirm that my avc should go through.
.
My words of advice for all those wanting to retire early is concentrate on your spending, learn to live a frugal but good life,

Paul_Herring

is SS the same as AVC

I don't think there's a 'lower limit' on contributions as there is with salary sacrifice, and a google search indicates they (or at least some) are eligible for tax relief suggesting they're out of after-tax pay, but I'd wait for someone more knowledgeable in the area of AVC to comment.

You can pay as much or as little as you like into your AVC pension as long as you don’t exceed the pension contribution limit, which applies to all of your pensions

Which (optimistically, and personally,) reinforces my google-fed opinion.

Marcon

Linton wrote: »

if it was an employer pension and the contribution was made before tax then the OP would pay in the full £26K. There would be £26K + employers contribution in the OPs pension and nothing in his pocket

Wouldn't work - even if the employee's pension contribution is made before tax is deducted, employee's NI is still payable, so the maximum employee contribution would be £26,000 - employee's NI.