Using pension contributions to lower tax

LittleAlien

Dear Experts, I have a nice problem: I recently received a pay rise from my employers (hurray!) that has taken me to the next tax threshold of 40%. I first realised this when I was submitting my Self Assessment Tax Return for a little side job I do (not my main income). I earn £1,200 from this side job and was surprised to find I owed nearly half of it in tax! I was talking to someone about this, and they said that I could put the amount I earn from my side job (in fact any income over the lower tax threshold) into a pension scheme (presumably my employers')and that I would not then have to pay tax on it or could claim it back. I liked the idea of this as I've been meaning to 'up' my pension for a while now! Is it true that I could do this (and most importantly, is it legal?) If so, how would I do it? Any ideas gratefully received :-)

Dazed_and_C0nfused

I earn £1,200

Is that turnover of profit?

Whoever you talked to hasn't really explained very well.

Pension contributions won't alter the amount of your business profits which are taxable but they may change the rate they are taxed at.

Is the pension scheme you are thinking of contributing to a "relief at source" scheme?

LittleAlien

Sorry for the late reply-my email notifications must have been turned off! The figure is turnover.

LittleAlien

I'm not sure about the pension scheme. The more I think of it, the more it seems sketchy.

Jeremy535897

LittleAlien said:

Sorry for the late reply-my email notifications must have been turned off! The figure is turnover.

Why didn't you claim the £1,000 trading allowance, which would have reduced the tax bill to £80?

LittleAlien

Crikey, I didn't know about this, but I've just looked at it and it is brilliant! I'll definitely be doing this. Thanks Jeremy-this is what comes of having a hobby-job but not knowing enough about finance.... cheers :-)

[Deleted User]

LittleAlien said:

Crikey, I didn't know about this, but I've just looked at it and it is brilliant! I'll definitely be doing this. Thanks Jeremy-this is what comes of having a hobby-job but not knowing enough about finance.... cheers :-)

You have until 31st January 2023 to amend your return for 2020/21 tax year.

KingOfSnake

It all depends on your long term plans and attitude to risk. Pensions can go down as well as up, but are generally good in the long term - the probem currently is what to do with the 'pot' at the end as annuity rates are miniscule. 
For your specific query, you'll get basic rate pension relief at source (i.e. the registered pension scheme claims back basic rate tax from HMRC - this is effectively 25% in the £1) and then you claim the higher rate tax relief directly from HMRC. I do this via SA online and it is easy, but think you can do it via personal tax account if not within SA. 
The alternative is to ask you employer if they do pension salary sacrifice as this will not only give you the full 40% tax relief at souce (turns a net employee contribution into a gross employer contribution) but you also will get the 2% employee NIC "relief" as the salary is not subject to NIC. 
So if you pay in £800 you'll get £200 tax relief at souce and £200 tax rebate via HMRC (assuming you don't do the sal sac route) - so it costs you £600 to have £1000 in pension. When you retire you can take (currently, but rules may change) 25% out tax free cash - so you have £750 in pension pot to utilise and £250 in cash. 
The Pension Advisory Service will give you free advice (I don't know if you have to be a certain age). 

LittleAlien

Thanks for your response KingOfSnake. I think what your message has made me realise is that I actually need to solve for the broader question of what my long term financial plans are. Having not much money when I was younger meant my plan read loosely as: "Pay the rent", but now I'm (quite a bit) older and have a proper monthly income I need to figure out how I manage my money so it to ensure long term security. I feel like if I don't make sensible choices/ investments now, it might all evaporate!

Albermarle

t all depends on your long term plans and attitude to risk. Pensions can go down as well as up, but are generally good in the long term - the probem currently is what to do with the 'pot' at the end as annuity rates are miniscule. 

Historically all mainstream investments have gone up in the long term, including investments in pensions .

Annuities are not usually used for pension pots at retirement anymore , with drawdown being preferred.

OP - This is a link to the Government website for personal finance. it covers many personal finance issues, including pensions. 

Free and impartial help with money, backed by the government | MoneyHelper

Plus there is a pensions forum on MSE if you want more specific guidance.