Scottish Income Tax with Rental Property Earnings

kt88

Hello,
My partner is paid £43,524 per year at the moment, and she owns a rental property with me, where we split the income in half (around £5,000 each per year).
She is now pushed into the higher 41% tax bracket by around £90 (which starts at £43,431 - without taking property income into account), since all council staff were given a pay rise.
Does this mean that all her property income will be taxed at 41%?

I should say, £2000 a year is automatically taken from her wages to pay off her student loan, so I suppose this may help? Basically, she is trying to prevent being taxed at 41%. 
An idea to avoid this 41% tax was to ask the council to pay 2 months wage into her SIPP pension as an employer contribution. Would this help?

Thanks for the advice!

Dazed_and_C0nfused

If the £43,524 is her taxable pay then yes you are correct.

But if it's her salary then that is usually irrelevant for tax purposes, particularly when someone is in a defined benefit pension where pension contributions could be being paid under a net pay arrangement.

So what will her P60 show?  £43,524 or less?

I doubt the council will pay anything into her SIPP and definitely not a full month's wage as they would fall foul of NMW regulations.

If she contributes to a SIPP she will get 25% added by the pension company and the gross contribution will increase the amount of her basic rate tax band, potentially reducing the higher rate tax payable.

kt88

It says her salary is £43,524 (see attachment - removed all personal information)

Hope this helps explain!

Dazed_and_C0nfused

Based on that payslip she is in a net pay pension scheme so her salary is irrelevant.

The payslip shows she is earning at a rate of £40,478 (£3,627.06 - £253.89 = £3,373.17 x 12).  The tax on that payslip is correct for £3,373.

So she has a bit of unused 21% rate to use before 41% applies.

kt88

Thank you!
So, I guess she has £2953 at the 21% rate, with the rest at 41%?

Dazed_and_C0nfused said:

If she contributes to a SIPP she will get 25% added by the pension company and the gross contribution will increase the amount of her basic rate tax band, potentially reducing the higher rate tax payable.

If she pays in the remainder of her rental earnings that fall under the 41% tax rate (5000 - 2953 = £2047), into her pension as a personal contribution, would this eliminate any 41% taxation?

Dazed_and_C0nfused

Do you mean she actually pays over £2,047 to the pension company or she contributes £2,047 with the basic rate relief the pension company will add included?

kt88

She has not paid anything yet into her SIPP, as we wanted to come up with a plan to ensure we were doing it right.
If her total profit from rental is £5000, she will have £2047 allowance left that can be taxed at 21%. But this means there is £2047 left over that will be taxed at 41% if she doesn't do anything to prevent this from happening. My idea was to pay this £2047 into her SIPP as a personal contribution, so she wouldn't be taxed at 41% for this amount. Does this idea work?

Dazed_and_C0nfused

If you want to increase her basic rate band by £2047 then she only needs to pay over £1637.60 to the pension company.

They will add £409.40 basic rate relief giving a pension fund of £2047.

The gross contribution of £2047 increases the basic rate tax band by £2047 moving income from the intermediate rate band to the basic rate band and then from the higher rate band into the £2047 which has become available in the intermediate rate band.

kt88

Thanks very much for your advice! Would this be the best way to proceed in your opinion?
She is about to go on maternity leave in August, so I guess this won't affect her maternity pay, as I read somewhere that pension contributions influence maternity pay. Bit of a mine field, but becoming clearer