High Income Child Benefit Tax Charge and pensions - any help please?

Bossworld

I'll think I'll be going over 50k for the first time this next 21/22 tax year and need some advice/clarity on making additional pension contributions, please. 

It's a bit sad but I know how to run a payroll from a previous life, so I process mine each month in computer software so there are no nasty surprises.

I've done the sums quickly and having opted into a higher pension accrual rate of the CARE scheme, my gross income for the year will be approx £49k.  That's including the remaining months of a cyclescheme salary sacrifice, and a secondary £15 a month pension contribution into another scheme, again via salary sacrifice.

The place I'm working has consistently paid out a bonus for staff over the last few years, which would obviously take me over £50k.

I've done the sums and after the personal allowance, I'll 'lose' 51% of pretty much anything over 50k (40% PAYE, 2% NI, 9% student loan).  As a rough calculation of a 10% bonus, that would mean an adjusted net income of £53,900.  For argument's sake for tax code purposes, let's say £50k will also be the starting point for 40% PAYE and 2% NI.   So in reality, that extra £4,900 would mean a net payment of approx. £2501 (£3900 taxed at 51%, £1000 taxed at 41% due to PAYE being 20% but NI being 12%).

But based on the High Income Child Benefit Tax Charge being between 50 and 60k, there would also be a further £712 deducted.   So that £4900 is 'only' worth £1789 net.

---

So, thank you for reading this far.  Where I'm confused is, if I was to pay some of this into the secondary pension scheme, what is the tax benefit to me?

As far as I can see, I'm saving 40% in tax, I'm saving 2% in NI, and I'm 'avoiding' the 9% student loan deduction.  I'm also avoiding the High Income CB tax charge.

I found this link https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/reduce-high-income-child-benefit-charge/ which gives a very similar example in its case study 1:

How can this charge be mitigated?

If Mr A makes a net relief at source pension contribution of £2,400 then this would be grossed up to £3,000. This £3,000 is deducted from the taxable income leaving an adjusted net income of £50,000. This would mean that there is no tax charge to pay. He would then be able to claim another £600 back as higher rate relief applies. Therefore, the pension contribution would actually cost £1,800.

The total tax saving is £1,200 plus £763 = £1,963.

So, the effective rate of tax relief is 65.43%

Am I over complicating things and it's just as simple as making a £3900 additional pension contribution and that's me avoiding any further taxes/penalties?  My additional pension contributions are done via salary sacrifice, so is the effect of this 'higher rate relief' already taken into account?

Dazed_and_C0nfused

Firstly salary sacrifice means you aren't contributing to a pension, you are agreeing to a lower salary in return for your employer contributing more to your pension. 

That is why there is no pension tax relief with salary sacrifice, the tax (and National Insurance) saving comes from not having the salary in the first place.

Pension contributions will no doubt help in the scenario you outline but there are four different methods of getting money into your pension and they all work in slightly different ways so you need to advise which method you will be using for these additional contributions in order for the impact to be explained correctly.

Bossworld

Dazed_and_C0nfused said:

Firstly salary sacrifice means you aren't contributing to a pension, you are agreeing to a lower salary in return for your employer contributing more to your pension. 

That is why there is no pension tax relief with salary sacrifice, the tax (and National Insurance) saving comes from not having the salary in the first place.

Pension contributions will no doubt help in the scenario you outline but there are four different methods of getting money into your pension and they all work in slightly different ways so you need to advise which method you will be using for these additional contributions in order for the impact to be explained correctly.

Thanks, that makes sense, I’ve only ever made payments to pensions via salary sacrifice. The CARE scheme has a default value of 1/95 and to up it to 1/80 costs 6% of salary (via salary sacrifice). You can’t manually top this one up, hence the secondary scheme is available. 

I have a regular monthly salary sacrifice deduction into the secondary scheme (as I’ve transferred in my old defined contribution pot from my previous job, as the management fee was lower).

I think I can choose to salary sacrifice an amount of any bonus into the secondary scheme, so I guess I just need to have a look at how my gross taxable pay YTD is looking by month 11/12? I’ll double check that it’s definitely salary sacrifice first 
though.

Dazed_and_C0nfused

Salary sacrifice is the simplest and for most people the most tax efficient.

You cannot deduct the pension contributions when calculating your adjusted net income (HICBC) or from your taxable income.  Simply because you don't contribute to the pension.

For example if your "salary" is £60,000 and you sacrifice £10,000 then your P60 will show taxable pay of £50,000.  If you deducted the pension contribution (that your employer is actually making) you would be double counting them.

When calculating your adjusted net income don't forget that interest and dividends, which may be taxed at 0%, still have to be included.

Bossworld

Dazed_and_C0nfused said:

Salary sacrifice is the simplest and for most people the most tax efficient.

You cannot deduct the pension contributions when calculating your adjusted net income (HICBC) or from your taxable income.  Simply because you don't contribute to the pension.

For example if your "salary" is £60,000 and you sacrifice £10,000 then your P60 will show taxable pay of £50,000.  If you deducted the pension contribution (that your employer is actually making) you would be double counting them.

When calculating your adjusted net income don't forget that interest and dividends, which may be taxed at 0%, still have to be included.

Understood. The payroll software shows the salary sacrifice pension contributions under an ‘Employers’ button so that tallies with your description. I’ve been doing a test run to month 11 and checking the gross taxable pay value. I’d also completely forgotten that the company medical insurance is a payrolled BIK so unfortunately bumps the notional taxable income up by a further £800 or so. Still, probably not worth opting out of that one.

Sorry I realise this is possibly more of a ‘Benefits’ topic now but to your point on interest forming part of the calculations for HICBC, does that include the threepence ha’penny an ISA would currently generate? 

Dazed_and_C0nfused

No, interest from an ISA (assuming you have adhered to the rules) isn't taxable and isn't part of the adjusted net income calculation.

Bossworld

Thank you, looks like a bit of short term loss for longer term gain is very much on the cards then. There must be a tonne of people stuck in a ‘trap’ between 50-60k

ukdw

This thread may be of interest, particularly the idea of salary sacrifice concentration, which would potentially allow you to get a 12% NI benefit instead of 2% if cash flow allows it, and you don't mind changing your salary sacrifice amount up and down occasionally,

https://forums.moneysavingexpert.com/discussion/comment/77854003#Comment_77854003

Also, if cash flow allows it, worth considering going a fair bit into the 20% band anyway due to your bonus/benefits risk - as you still get 12% NI and 9% student loan plus the 20% tax relief - which is a big uplift compared to the tax payable on drawdown.

ps/ Whilst £800 company notional healthcare may sound a lot - it is probably a lot cheaper than you would have to pay as a private individual when you retire - I recently stopped mine when it increased by about 15% to over £3k a year for continuation of previous company scheme.

Bossworld

Thank you I’ll take a longer look later. I’m 25+ years away (at best) from retirement so it’s going to be a long game.

The CARE contributions are decided at the start of the year so the secondary plan is all I can realistically play with on a more regular basis.

Had some back and forth confusion but turns out everything here is salary sacrifice which makes things infinitely simpler.