Pensions, higher rate tax and car allowance

HCIMbtw

Hi there,

I am really struggling to understand if I am being tax efficient with saving for my pension or not and if anyone could clarify the best route forward it would be helpful.

I work for a large company and have a company pension which provides 8% contribution on top of my 5%. I pay additional voluntary contributions into my pension of 10%, so have a different line on payslip that accounts for this.

My base salary is around £49k pa.
However I get a taxable car allowance of £5.8k pa.
Total £54.5k
Total pension contributions £7.27k
Total student loan payments (if these are relevant) £3k.

I’ve no idea if or what I am getting 40% tax relief on, or what is entitled to 40% tax relief. Deducting 7.2 from 49 I more than cover the higher rate tax benefit with my pension contributions, but deducting 7.2 from 54.5 I do not and should probably pay some more... I have never completed a self assessment tax return and have no idea if I should.

I’m considering stopping my current 10% AVCs and setting up a SIPP so I have easier control over what the money is invested in and how it is managed with regard to tax.

Would appreciate even any links to appropriate reading

Thanks

Brynsam

Start with https://www.gov.uk/check-if-you-need-tax-return

MallyGirl

Do you contribute via salary sacrifice?

HCIMbtw

Have actually worked a lot of it out and spoken with a couple of people.

The car allowance should just be considered as salary for the sake of tax purposes so I essentially earn 54.5. This means my opportunity for tax efficiency on pensions contributions in the 40% bracket it £54.5-46.35, £8,206. Almost exactly 15%

However the 15% contributions I am making at the minute are calculated on my base salary not including car allowance. So I am not really optimising efficiency and should be contributing about 11.8% AVCs to take full advantage.

Also found out the contribution of 5% are deducted before tax & NI, but contributions through AVC are only deducted before tax, not NI. Not sure why this is the case and would be interested to know? but apparently this wouldn’t be any different for a SIPP.

I could sack off the AVCs and set up a SIPP, which would give me greater flexibility with regard to where money is invested, and spread some risk in that I’d have money invested in two separate funds, but I would then have to complete self assessment tax returns to ensure I get the benefit of the additional 40% tax relief.

Am going to look into how my current pension is invested and the associated fees to make sure i’m happy.

squirrelpie

Some pension schemes had arrangements whereby you could apply AVCs to e.g. increase tax free lump sum payments without affecting the pension payments. I don't know whether such possibilities still exist, or whether they might be beneficial to you, but it would be worth reading your scheme details book carefully to see what options you have with the AVCs. Then you would be better placed to decide between AVCs and a separate SIPP.


Another factor to consider is whether you feel safe with all your eggs in one basket.

Anonymous101

HCIMbtw wrote: »

Have actually worked a lot of it out and spoken with a couple of people.

The car allowance should just be considered as salary for the sake of tax purposes so I essentially earn 54.5. This means my opportunity for tax efficiency on pensions contributions in the 40% bracket it £54.5-46.35, £8,206. Almost exactly 15%

However the 15% contributions I am making at the minute are calculated on my base salary not including car allowance. So I am not really optimising efficiency and should be contributing about 11.8% AVCs to take full advantage.

Also found out the contribution of 5% are deducted before tax & NI, but contributions through AVC are only deducted before tax, not NI. Not sure why this is the case and would be interested to know? but apparently this wouldn’t be any different for a SIPP.

I could sack off the AVCs and set up a SIPP, which would give me greater flexibility with regard to where money is invested, and spread some risk in that I’d have money invested in two separate funds, but I would then have to complete self assessment tax returns to ensure I get the benefit of the additional 40% tax relief.

Am going to look into how my current pension is invested and the associated fees to make sure i’m happy.

Are you sure that your AVC's are taken in that way?


I've worked for a number of companies where I've been paid in a similar way to yourself. Salary plus car allowance with Sal Sac pensions on salary etc. I've never heard of AVC's being taken a different way to regular contributions like that.


The best route would be to try and get all your contributions taken as sal sac if that is possible. That way you'd save both Tax and NI on all the contribution.


The higher rate tax band is £50k for the 2019/20 tax year so you won't be paying any 40% with your level of contributions. The N.I. at the lower bracket is important though as its 12%. A lot of people loose sight to that with pensions in sal sac.


Higher rate = 40% tax plus 2% NI = 42%
Lower rate = 20% tax plus 12% NI = 32%


So its still well worth contributing to your pension through sal sac rather than a separate SIPP is you are able to.

HCIMbtw

Anonymous101 wrote: »

Are you sure that your AVC's are taken in that way?


I've worked for a number of companies where I've been paid in a similar way to yourself. Salary plus car allowance with Sal Sac pensions on salary etc. I've never heard of AVC's being taken a different way to regular contributions like that.


The best route would be to try and get all your contributions taken as sal sac if that is possible. That way you'd save both Tax and NI on all the contribution.


The higher rate tax band is £50k for the 2019/20 tax year so you won't be paying any 40% with your level of contributions. The N.I. at the lower bracket is important though as its 12%. A lot of people loose sight to that with pensions in sal sac.


Higher rate = 40% tax plus 2% NI = 42%
Lower rate = 20% tax plus 12% NI = 32%


So its still well worth contributing to your pension through sal sac rather than a separate SIPP is you are able to.

Thanks for feedback, your spot on I was looking at last years tax rate like a plonka..

I think the 5% is essentially set up as salary sacrifice but the AVCs arent, which is why there is no NI tax benefit... probably because the 5% is a default for 1,000s of colleagues and managing individual payroll for the few people who do AVCs would be a pain.. but i'm making an assumption there

but in all of the guidance salary sacrifice isn't actually mentioned once.. EDIT: im fibbing it is mentioned once and the scheme is salary sacrifice

Anonymous101

Its seems odd to me that there's two separate systems. Big companies usually like to keep things simple plus if they have sal sac in place then they're missing out on the benefits of that by not putting your AVC's through it too. Its seems odd to me that they'd do that so I'd double check that your understanding of that is correct. You can do that by checking how much NI you're paying or with the payroll. I've never know a company do that.


So back to your original question. Most efficient way from a tax POV is to get it all sal sac. Then its to put more in and therefore pay less tax and NI overall.

HCIMbtw

Anonymous101 wrote: »

Its seems odd to me that there's two separate systems. Big companies usually like to keep things simple plus if they have sal sac in place then they're missing out on the benefits of that by not putting your AVC's through it too. Its seems odd to me that they'd do that so I'd double check that your understanding of that is correct. You can do that by checking how much NI you're paying or with the payroll. I've never know a company do that.


So back to your original question. Most efficient way from a tax POV is to get it all sal sac. Then its to put more in and therefore pay less tax and NI overall.

Turns out to be as i assumed, comes down to number of colleagues and the burden of managing AVCs as Sal Sac and trying not to create confusion with the HMRC.. they have looked into it before, aware other companies have it typically all as Sal Sac, may change in the future, but that is the way it is ... Annoying losing 12% to NI though...

My trail of thought now is put money I want tied up long term into my pension and then set up an S&S ISA as a Savings account for earlier access to money in my 50s

Anonymous101

I would imagine its less burden??? Ah well some companies do odd things and its unfortunate that this one is a negative for you.


Yes I would think its a good idea to have a S&S ISA if you don't already. I have both. If there's one thing you can bank on its change and access to pensions, tax, your employer etc can change. You're certainly wise to spread your bets a little and leave yourself a few options especially if you're a way from retirement.

Albermarle

My trail of thought now is put money I want tied up long term into my pension and then set up an S&S ISA as a Savings account for earlier access to money in my 50s

This makes sense as a general idea . However a couple of points to think about :
I am sure you know this, but A S&S ISA is NOT a savings account but an investment account . A cash ISA is a savings account . Your timescale for any investment based account ideally should also be long term , ideally at least 10 years, to ride out any market volatility.
In any case it is important to remember that within a pension and a S&S ISA , your money is actually invested in funds and you have a choice of which funds ( sometimes a big choice and sometimes a small choice depending on the provider) that your money is invested in that best suit your situation/age/risk appetite.