Pension contributions - what counts as "taxable income"?

itwasntme001

Hello,

I am looking to contribute a lump sum to my pension for the current tax year and am trying to work out how much I need to contribute to bring me into the 20% tax bracket so that I 1) reduce all income liable for 40% tax and 2) obtain an interest on savings allowance of £1k rather then £500 (since I have a lot of cash savings).

I know how much my taxable income is from my employment for the current tax year, as well as both my mine and my employer pension contributions to date.  I also know roughly how much savings interest I will have received this tax year as well as dividends from company shares.  My main question is does this interest on savings and dividends count towards my taxable income that could tip me into the 40% tax bracket in which case I would need to account for these 2 other forms of income when making my lump sum contribution?  How would the interest and dividend allowances effect this?  Please keep in mind my 2nd aim of giving myself the £1k interest allowance instead of £500.

I have unused pension allowance from previous years which I will carry over to this year so I can make a bigger lump sum then I otherwise would be able to; do I need to do anything to apply for this or will this automatically be considered?

Thanks

Dazed_and_C0nfused

itwasntme001 said:

Hello,

I am looking to contribute a lump sum to my pension for the current tax year and am trying to work out how much I need to contribute to bring me into the 20% tax bracket so that I 1) reduce all income liable for 40% tax and 2) obtain an interest on savings allowance of £1k rather then £500 (since I have a lot of cash savings).

I know how much my taxable income is from my employment for the current tax year, as well as both my mine and my employer pension contributions to date.  I also know roughly how much savings interest I will have received this tax year as well as dividends from company shares.  My main question is does this interest on savings and dividends count towards my taxable income that could tip me into the 40% tax bracket in which case I would need to account for these 2 other forms of income when making my lump sum contribution?  How would the interest and dividend allowances effect this?  Please keep in mind my 2nd aim of giving myself the £1k interest allowance instead of £500.

I have unused pension allowance from previous years which I will carry over to this year so I can make a bigger lump sum then I otherwise would be able to; do I need to do anything to apply for this or will this automatically be considered?

Thanks

Have you worked out your tax position without making an extra pension contribution?

What type of pension contribution do you intend making?  One that reduces your taxable income such as a net pay contribution to your employers scheme or a relief at source contribution to a personal pension or SIPP which doesn't reduce your taxable income but does increase your basic rate tax band?

If you use carry forward you need to keep the details/calculation in case HMRC ever ask for them.

And don't forget to include the taxable profit from your BTL when calculating your total taxable income.

itwasntme001

Yes i worked out my tax position using the latest payslip (12th month of current tax year).

It will be a net payment to my employer scheme.

So my question is do interest on savings and dividends on shares count as taxable income that can potentially tip me into the higher tax band and therefore i can contribute enough into my pension to bring me into the lower tax band?

What about capital gains on shares, does this count as taxable income?

Brynsam

Interest on savings and dividends counts as taxable income once you've used up all available allowances. They can't be counted when you are looking at pensionable income. 

Johnnyboy11

Worth mentioning that you get a £2k annual dividend allowance and antyhing above that gets taxed differently from Income Tax, see here: https://www.gov.uk/tax-on-dividends

itwasntme001

Sorry i may not have been clear.  I completely understand about the tax free allowances for dividends and interest.  My question is can interest and dividends tip you over into higher tax bracket irrespective of using the tax free allowances and therefore my personal savings allowance could fall from £1k to £500?  In which case can i contribute enough to my pension to avoid this happening (assuming the pension contribution rules are complied with)?

zagfles

Yes if savings/dividends put you over the higher rate threshold then as far as things like the savings allowance, marriage allowance, and child ben taper etc, you are a higher rate taxpayer even if you don't actually pay higher rate due to the savings/dividend allowance.

itwasntme001

Thanks zagfles, was very difficult to find the answer to my question on these forums and elsewhere on the internet but you have answered it clearly.

Have made my lump sum into my pension to take advantage of the tax benefit, "low" stock price and also benefit from the maximum personal savings allowance.