Personal Allowance and Pension Dilemma

Taxed

Hello, I just wanted to say that I don't mind paying taxes, but I do need some help to get my head around something. I work in sales and obviously pay can go up and down. You have good years and bad years. Last year, I had a good year. Last year I earned £120,000, but only paid £7,202 into my pension. On top of this my wife still claims Child benefit as it seems to sort out her national insurance contributions. In the last tax year, HMRC took back an overpayment of Child Benefit from 2018-19 and then half way through the year took back the Child Benefit from 2019-20 half way through. This is fine and means we're now up to date with that. I ended up with a Personal Allowance of -£17,000. I think that was also because I lost a proportion of the normal personal allowance for going over £100,000. Looking back, I think I should have paid more into my pension than I did. 

The question that I have is about this tax year 2020-21. I have PAYE income tax estimate that looks like this and is based on replicating the same income again. It give me -£393 tax free amount again. This is based on earning £120,000 again, paying £7,202 again into a pension and paying the child benefit charge in advance. 
My Tax code is K38 at the moment. 
Should I increase my pension payments to £20,000 (£1666 per month)? Would this give me a personal allowance again? I am quite confused about what to do as my pay could be much less or could be slightly more.
Is there anything else that I can do to be cleverer about things? 
I suppose it is something that I can review periodically through the year. I just don't want to leave it too late as I have a habit of doing that. 
Thank you in advance if anyone knows anything about this


Here's the tax code breakdown from the HMRC site:

Your tax-free amount for 6 April 2020 to 5 April 2021

This section is Understand your tax

Your tax code is worked out from your tax-free amount. Your tax-free amount is the income you can have before paying tax and any additions or deductions

Your annual tax-free amount is −£393

It can be:

• increased if you qualify for certain allowances or tax reliefs
• decreased to collect tax due for company benefits or income from other sources

How your tax-free amount is calculated

Personal Allowance

The amount is £6,102

Additions

• Personal Pension Payments
  £3,602 &nbsp
• Total additions
  £3,602

Deductions

• Underpayment from previous year (£768) 
  £3,844
• Child Benefit
  £6,253
• Total deductions
  £10,097

Your total tax-free amount

The amount is −£393

Dazed_and_C0nfused

Before you get any more confused you cannot have a negative Personal Allowance.

You are mixing up your Personal Allowance and your tax code allowances.

You need to read up on adjusted net income as this is what both the Personal Allowance and High Income Child Benefit Charge is based on.  Not your taxable income.

Irrespective of what might have happened to your tax code for 2019:20 your tax position for that year will only be finalised once you fuel your Self Assessment return for that tax year.

You can have an effective tax rate of 60% when you lose your Personal Allowance and pension contributions (or charitable giving under the Gift Aid system) are considered very tax efficient in this situation.

Depending on the method you contribute you could say end up with a £10,000 pension fund costing you just £4,000

Taxed

Hello, thanks for the response. Yes, I am really getting confused. I have already done the SA for 2019/20. 
 From what I understand then, if I earned the same this year, then the personal allowance is always reduced over £100,000.  I was thinking that an increase in pension payments would bring the taxable income down to replenish the personal allowance. Either way it looks like I should have done something last tax year. 

The provisional calculations are below from the HMRC website. It looks to me as though I have missed out by not paying more into a my pension. I just don't understand by what amount would be the most efficient. I am probably over-complicating things in my head. 

This section provides you with a breakdown of your full calculation. If it says your tax return is 100% complete then you have submitted your return and this is a copy of the information held on your official online Self Assessment tax account with HM Revenue and Customs.

Pay from all employments	£120,303.00
Total income received	£120,303.00

minus Reduced Personal Allowance

£5,950.00

Total income on which tax is due

£114,353.00

How we have worked out your income tax

Your basic rate limit has been increased by £7,203.00 to £44,703.00 for pension payments.

This reduces the amount of income charged to higher rates of tax.

	Amount	Percentage	Total
Pay, pensions, profit etc. (UK rate for England and Northern Ireland)
Basic rate	£44,703.00	x 20%	£8,940.60
Higher rate	£69,650.00	x 40%	£27,860.00
Total income on which tax has been charged			£114,353.00
Income Tax due			£36,800.60
plus Underpaid tax for earlier years in your tax code for 2019-20	£2,301.00
plus High Income Child Benefit Charge	£2,501.00
Income Tax due			£41,602.60
minus Tax deducted
From all employments, UK pensions and state benefits	£41,942.00
Total tax deducted	£41,942.00
Income Tax overpaid			£339.40

Dazed_and_C0nfused

You need to distinguish taxable income and adjusted net income.  As you will have seen from the calculation you have copied your pension contribution has not reduced your taxable income at all.

It does however reduce your adjusted net income which is used for calculating your Personal Allowance (and the High Income Child Benefit Charge).

Your adjusted net income is £113,100* so you have lost £6,550 of your Personal Allowance (£12,500 reduced down to £5,950).
*£120,303 less £7,203

If you had contributed another £13,100 to a relief at source pension (you would have paid £10,480 with the pension company adding basic rate tax relief of £2,620) then your adjusted net income would have been £100,000 and you would have retained your full Personal Allowance.

That £13,100 would have further increased your basic rate band from £44,703 to £57,803 this moving more of your income from the 40% to 20% tax band.

Overall very tax efficient.

All of the above is assuming you are planning on making relief at source contributions.  The other methods such as net pay all work differently