Tax relief for higher earners

DrHyde

Good morning,
I live in Scotland where the higher income tax is paid from earnings over £43,431.
My annual salary is at just about that mark though I typically also get a 10% bonus at the end of the financial year too.
To make use of the tax relief for higher earners I planned to save my entire bonus in my pension so I can reclaim the tax relief.
But rather than paying my bonus into my pension in one go (at the point I receive the bonus) I sought to drip-feed the amount of my anticipated bonus into the pension over the course of a year. So I've invested about £350 per month into my pension - this was an amount deducted from my gross salary.
Logging in my HMRC account, I see that my income forecast for this FY is only about £38,800 which makes sense because the (£350 * 12 £4200 are deducted from my gross salary in that overview. The anticipated bonus does not yet show there which makes sense too.
I'm trying to calculate if I had been better off if rather than drip-feeding every month, I had just paid in one go when receiving the bonus. My thinking goes that of the anticipated £4,300 bonus, I'd be paid out 59% if I'm right (because every pound I earn over my base salary makes me a higher rate tax payer, ie, £2600) but if I had put this amount into my pension, I'd get 20% (£2600 * 20%=) £516 back via tax relief.
So this to me suggests that I'm better off drip-feeding into my pension, rather than making one big contribution.
Can anyone verify my thinking.
Thank you, DrH

Dazed_and_C0nfused

If both contributions would be made under the same method, presumably net pay from what you describe, there really is no difference tax relief wise.

But are you saying the lump sum would be paid into a relief at source scheme and you would have paid the £350 under a net pay scheme anyway?

And higher rate tax relief doesn't work like that anyway, there is no set extra 20%.  But until it is clearer exactly what you are doing then tricky to say how tax relief will work.

DrHyde

Thanks for the quick reply.
My bonus would either be paid out in cash or I can choose to pay it in directly from (from net pay it seems though "gross pay" would make more sense to me).
Essentially, the £350 are my individual contributions into my employer pension - I'm paying in more than I have to. Does that make sense?

Dazed_and_C0nfused

Each type of pension contribution works slightly differently and as a result the tax relief also works slightly differently as well.

Your reference to your (I'm assuming) taxable income only being £38,800 not £43,000 because of the £4,200 regular pension contributions is an indicator that those are net pay contributions.  Or you have salary sacrificed some salary in return for your employer contributing to the pension.

What you need to know is how will the bonus be paid into the pension and how much will you contribute? The same net pay (or sacrificed) method or other options would be relief at source, like contributions to a SIPP or personal pension.  Or maybe a one off lump sum to the scheme with no tax relief at all at the point you make the contribution (this is most often applicable to public service DB pensions).

DrHyde

Thank you again! I think salary sacrifice is the term I should have used. That sounds right. Thank you

Dazed_and_C0nfused

Salary sacrifice means there is no tax relief for you to claim or contact HMRC about as you aren't contributing anything to a pension and aren't entitled to any pension tax relief.

You are agreeing to a lower salary in return for your employer making contributions.

The tax (and National Insurance) saving comes from you having a lower taxable pay amount.

Salary sacrifice is generally seen as the best method for most people as you save NI as well as tax and some employers even contribute the NI saving they make by paying you a lower amount.

DrHyde

That's great, thank you very much!
Just one follow-up question very quick:
Fortunately I can now afford to save a little more in the pension when the bonus is paid (ie, I won't need the bonus payment for anything else). Would you rather use salary sacrifice? Or get that bonus paid out and contribute into a Lifetime ISA? I'm siding towards the latter (partly because HMRC's top-up is higher and partly to spread the risk since governments tend to meddle with different pension products at different times).
Thanks again!

Dazed_and_C0nfused

Have you compared the figures?

Would your employer be contributing anything to the pension from their NI saving?

CSL0183

A very complicated post to follow and give advice on. What will be your gross salary as of 5th April 2020? To the exact £?

How much pension do you pay? What % and by what method? Salary sacrifice? 

How much is your bonus? If it’s paid at the end of the FY then you would be looking to invest that into your pension fund through the next 12 months to 20/21?

Why don’t you just pay more into your pension throughout the year and then keep the bonus to top up your salary each month? 

If you play your cards right and the maths works out then you can in effect get 53% tax relief if your employer uses SS. 

Scotland’s £43,430-£50,000 band is taxed at 53%, not 41%. 

However, I think the maths is going to fail you and it’s likely you will only receive 33% relief (21%+12%) on your pension. 

Taking the £43,430 figure and without bonus but adding on typical 8-10% pension contribution, your gross salary would have to be in the region of around £48,000 (10% SS contribution £4,800) would bring your taxable salary down to £43,200 (Keeping you in the 21% band) - Your pension receiving pretty much the full 53% tax relief if this was the case. 

However, you have mentioned a 10% bonus. Presuming your gross salary is £48k, add on a 10% bonus, your approaching £53k earnings. You would then need to take that back down to £43,430 to benefit from the higher rate relief. 

You’ve mentioned a figure of £38,800 in your post though so you’re nowhere near a HRT payer. 

If your Gross Salary - SS Pension + Bonus takes you above £43,430. You need to bring everything down to £43,429 otherwise you will give 53% of your income to Nicola Sturgeon. 

And no, there’s no point in drip feeding a bonus. Just up your SS contributions and then drip feed your salary.  

Dazed_and_C0nfused

Even if existing salary sacrifice contributions are already taking the op below the 41% tax rate they would still be paying the 21% rate not just basic rate.

cloud_dog

So Sal Sac in Scotland is even better than England as the total saving is 33% (21% tax and 12% NI at BRT).

I may have misread one of the OPs above posts but I think they might still be a little confused, as they refer to a LISA being a better option.