Pension contribution to lower tax liability

AlanP_2

How about using a 0% card for purchasing over that 4 months to free up the cash and then repay the card over the next tax year from income?

Temporarily reduce mortgage payments?

Short-term overdraft facility?



Options that will cost more than you benefit overall - provided you "manage the debt" sensibly.

weimo

Dazed_and_confused wrote: »

There is no "allowance" for dividends.

Without a pension contribution your £59,000 would be taxed as follows

Personal Allowance £12,500 - no tax

Leaves £46,500 to be taxed.

£37,500 x 20% (basic rate)
£4,000 x 40% (higher rate)
£2,000 x 0% (dividend nil rate, using some of the higher rate tax band)
£3,000 x 32.5% (dividend higher rate)

If you make a gross relief at source contribution of £7.5k the £59,000 would be taxed,

Personal Allowance £12,500 - no tax

Leaves £46,500 to be taxed

£41,500 x 20% (basic rate)
£2,000 x 0% (dividend nil rate using up some of the basic rate band)
£1,500 x 7.5% (dividend basic/lower rate using up the rest of the basic rate band)
£1,500 x 32.5% (dividend higher rate)

Just to be clear....in my situation due to gross being over the threshold, there is no way to be lower rate tax on the dividend side? So this would always be higher rate (32.5%) in my situation as would CGT?

The pension contribution would not be effective here as it is a 20% tax credit on salary only not the other income streams.

Dazed_and_confused

You could contribute more to the pension.

What do you think the calculation would be if you contributed £9,000* to a relief at source pension scheme?

£7,200 from you plus £1,800 basic rate tax relief.

weimo

It's more that if I made the full 9k contribution, I'm not sure if this would then mean I only pay 7.5% on the remaining 3k of dividend?

Or as my total earnings before any relief are over the lower rate threshold I would pay 32.5% on the remaining 3k?

weimo

Dazed_and_confused wrote: »

You could contribute more to the pension.

What do you think the calculation would be if you contributed £9,000* to a relief at source pension scheme?

£7,200 from you plus £1,800 basic rate tax relief.

OK if I ignore the other things and just treat as salary:

59k salary.

I thought I had to put 9k in not actually 7,200 to then have the remaining 50k taxed at:

Tax free - 12,500
20% - 37,500

Dazed_and_confused

If you pay £9,000 into a relief at source scheme then the pension company will add £2,250 making £11,250 in the pension fund.

Confused now, what happened to the £5k dividend income?

weimo

I was trying to simplify it by removing the other parts and just treating it as salary. I know its not complicated but I'm getting muddled where the relief is applied.

Apodemus

If you have £5k in dividends from unwrapped investments, unless these are unlisted stocks, could you not start to transfer these into a SIPP to reduce the portion of dividends over the £2k nil rate, increase your pension (without the beans on toast effect), get the HMRC uplift and escape future CGT liability?

EDIT: my very rough calculation suggests you might have about £38k of unused pension contribution this year (possibly more if you carry-over from previous years). Selling unwrapped investments to that value and putting these into a SIPP would bring the tax on your salary way down and give you a good uplift on the investments, while reducing next year’s dividends by possibly £1k or so. All without affecting your take-home pay. Whether this works for you depends on your own personal circumstances and your ambitions for the money currently in unwrapped investments.

weimo

Thank you for the reply, I hadn't really thought about or considered a SIPP, if I'm honest I don't even really know what they are in terms of benefits. I will do some research on them, but I am not so sure if I would want to lock in shares (or proceeds of) for this time period and the whopping tax if you wish to withdraw.

At the moment my strategy is to place S&S into my ISA allowance every year.

Dazed_and_confused

If you make a gross relief at source contribution of £9k the £59,000 (with dividends making up £5k of the £59k) would be taxed,

Personal Allowance £12,500 - no tax

Leaves £46,500 to be taxed

£41,500 x 20% (basic rate)
£2,000 x 0% (dividend nil rate using up some of the basic rate band)
£3,000 x 7.5% (dividend basic/lower rate using up the rest of the basic rate band)