Topping up monthly pension contribution

noclaf

One of my last threads on this forum was a tax related query that inadvertently highlighted to me to the fact that I may not be using my pension to its full advantage so looking for some advice here from the more knowledgeable!

I earn £55k per year (paye) and am contributing 8% of my monthly salary to the employee pension scheme, my employer matches with 12% so net 20% to the pension monthly. That's the max contribution my employer will make so anything I add above that 8% will not be matched.
After taking into account PAYE, NIC,student loan etc etc my total annual 'taxable pay' is £50600.16 give or take a few quid.
I am saving for a property deposit so conscious of getting a balance between pension and saving but would it be worthwhile contributing an additional amount of my taxable pay in order to lower my income tax liability? If we are talking an additional £600 per year (£50 per month) then it shouldn't significantly dent my monthly saving as I assume the £50 per month pre tax would be closer to £30 ish after 40% tax...hopefully I've got my maths right here but please correct me if wrong.

Dazed_and_confused

After taking into account PAYE, NIC,student loan etc etc my total annual 'taxable pay' is £50600.16 give or take a few quid.

Not sure what PAYE, NIC or student loan has got to do with the calculation of taxable pay?

Do you mean £50600 is going to be the taxable pay on your P60 or something else?

What other taxable income do you have? Company benefits, interest, dental income, dividends etc.

noclaf

Dazed_and_confused wrote: »

Not sure what PAYE, NIC or student loan has got to do with the calculation of taxable pay?

Do you mean £50600 is going to be the taxable pay on your P60 or something else?

What other taxable income do you have? Company benefits, interest, dental income, dividends etc.

That's correct, I've taken the 'taxable pay' figure I expect to see on my next payslip and multiplied by 12 to give an annual figure.
I have a monthly £50 company benefit allowance that is additional to the £55k so £600 annual allowance. I will not be taking this as cash in 2020 and it will be used to purchase something e.g.: gym membership. I receive interest on current accounts and currently it's less than £30 per month. No other income sources.

Dazed_and_confused

I'm more confused now!

Is it £50,600 or £55,600 taxable pay??

I have a monthly £50 company benefit allowance that is additional to the £55k so £600 annual allowance

MDMD

noclaf wrote: »

That's correct, I've taken the 'taxable pay' figure I expect to see on my next payslip and multiplied by 12 to give an annual figure.
I have a monthly £50 company benefit allowance that is additional to the £55k so £600 annual allowance. I will not be taking this as cash in 2020 and it will be used to purchase something e.g.: gym membership. I receive interest on current accounts and currently it's less than £30 per month. No other income sources.

It doesn’t matter if you take it as cash or gym membership, healthcare etc you still need to include the value.

If they allow you to “buy” extra holiday that would be disregarded though.

marlot

A few ways to reduce tax:
- Buy extra holiday (if allowed) or reduce hours (if allowed)
- Contribute additional money to a pension
- Make a charitable donation (Charity gets 20%, you get the other 20% as a credit on your tax return). This could be something like the National Trust
- Make sure you're claiming tax relief for any expenses your company isn't repaying

noclaf

Dazed_and_confused wrote: »

I'm more confused now!

Is it £50,600 or £55,600 taxable pay??

Ok let's try again:

Annual salary :£55,000
Annual allowance :£600 (taxable and this is additional to the £55k base)

I've taken the £600 allowance as holidays this year so not taxable I assume?

'taxable pay' - these two words can be found on my payslip next to a number; when I do the calculations that number is (monthly salary+allowance) - pension contrubution. I have multiplied that said.number by 12 in the hope that gives me the total amount of my annual salary which is actually 'taxable'.

My qu is given my current salary and the element that is 'taxable' would it be worthwhile taking any surplus taxable pay above £50k and throwing that into the pension?

Dazed_and_confused

If you contribute £480 to a relief at source pension (SIPP, personal or stakeholder) then the pension company will add the 25% uplift to give you £600 in your pension fund.

If you then notify HMRC they will increase the amount you can pay basic rate tax at by £600.

So in your example you will pay an extra £600 at 20% instead of 40%, saving you £120 in tax (£600 x 20%).

So you end up with a £600 pension fund for a net cost of £360.

In reality you are unlikely to get a refund of exactly £120 but providing you are due to pay 40% tax on at least £600 then it should save you the £120.

Your savings interest of say £360 will all be taxed at 0% (the savings nil rate, aka Personal Savings Allowance).

noclaf

Dazed_and_confused wrote: »

If you contribute £480.

Ok I'm confused by the £480 figure.....If I am contributing an extra £600 to my pension from my taxable pay then wouldn't the 25% uplift from.pension co result in sum of £750 to my pension

How would I go about notifying HMRC, is it simply a case of calling them or is there a formal process to do it?
My pension provider is Standard Life and I think it's fairly straightforward to add any contribution above my standard 8% contribution

Dazed_and_confused

Yes. If you contributed £600 then the pension company would add £150 basic rate tax relief giving you £750 in your pension fund.

I had mistakenly assumed you were trying to hit the sweet spot of contributing just enough to get 40% tax relief on everything.

Anyway, your £600 which has become a gross contribution of £750 would increase your basic rate band by £750.

As you are only paying higher rate tax on £600 this still only saves you £120 in tax.

So you have £750 in your pension fund for a net cost of £480 (average of 36% tax benefit not the 40% if you only paid out £480 to start with).

For small amounts like this you can just phone or write to HMRC. If you do it during the tax year you make the contribution in they will make a provisional adjustment to your tax code. This will be reviewed after the end of the tax year and any further adjustment necessary made i.e if your taxable salary was less than expected and you weren't actually due all the tax relief provisionally allowed via your tax code.

Or just wait until after the end of the tax year you make the contribution in and tell them then and get a refund of any tax overpaid.

noclaf

Dazed_and_confused wrote: »

Yes. If you contributed £600 then the pension company would add £150 basic rate tax relief giving you £750 in your pension fund.

I had mistakenly assumed you were trying to hit the sweet spot of contributing just enough to get 40% tax relief on everything.

Anyway, your £600 which has become a gross contribution of £750 would increase your basic rate band by £750.

As you are only paying higher rate tax on £600 this still only saves you £120 in tax.

So you have £750 in your pension fund for a net cost of £480 (average of 36% tax benefit not the 40% if you only paid out £480 to start with).

For small amounts like this you can just phone or write to HMRC. If you do it during the tax year you make the contribution in they will make a provisional adjustment to your tax code. This will be reviewed after the end of the tax year and any further adjustment necessary made i.e if your taxable salary was less than expected and you weren't actually due all the tax relief provisionally allowed via your tax code.

Or just wait until after the end of the tax year you make the contribution in and tell them then and get a refund of any tax overpaid.

Ah I see, no you were right..I was trying to get 40% tax relief on the lot however for such a minimal gain not sure its worthwhile the extra time and effort.