Personal allowance trap help

catowner123

Hi

I’m new to just earning over £100k and need help with understanding the personal allowance tax trap. 

Base Salary: £103k
Bonus: £25k
Pension Contributions: I pay 5% and employer 15% through PAYE

What can I do to avoid losing my personal allowance? I understand I can elect to have my entire bonus into my pension, however what about the fact I still earn £3k over £100k? How to I pay that extra £3k into a pension given I already contribute into my work scheme? 

Also in reality I was just wondering whether most people earning over £100k do this and reduce income to retain the allowance? Or do most simply just pay the extra tax as they would still end up with extra cash each month despite most of it going to be government. 

Pennywise

In my experience, most people with income between £100-£125k pay enough into pension to get their taxable pay down to £99,999.

The BR tax relief paid by HMRC goes into the pension pot, and not only do you save your personal allowance, you get higher rate tax relief too!

If you, say, pay £20k, then HMRC top up by £5k, so your pension pot is worth £25k, but you save £10k in tax, so your pension pot of £25k only costs you £10k.  That's just about the best investment return you'll get.  If you don't need the wages for anything else, it's a no brainer.

Don't forget you don't lose the PA as soon as you go over £100k - it tapers away between 100-125, so you don't need to be paranoid about getting the pension figure spot on - if you pay slight too little and end up with taxable income of £101k, you only lose a small percentage of your personal allowance (5%) from £12570 to £11945.

Dazed_and_C0nfused

When calculating what to pay into your pension you need to take into account that Personal Allowance is based on adjusted net income (info on gov.uk) not taxable income.

Relief at source pension contributions won't reduce your taxable income but they do reduce your adjusted net income.

You also need to factor in any other taxable income such as interest or dividends.  Although smallish amounts may be taxed at 0% they are still taxable income and increase your adjusted net income.

catowner123

Thanks.
So ignoring my bonus which I can easily move into my pension what do I do with my base salary to get this to £100k.

- will my 103k be reduced by 5% pension contributions for purposes of calculating tax and my allowance? Ie in that case my net adjustable income is less than 100k already?
- if not how do I tell my employer I want 3ks worth to go into my pension? Would I simply just increase the amount I contribute into my pension? E.g rather then 5% I would do 6 or 7% 

Dazed_and_C0nfused

What method do you use to contribute the 5%?

Net pay

Relief at source

Salary sacrifice

catowner123

Salary sacrifice - it’s taken from my gross 

Dazed_and_C0nfused

Then you cannot deduct it.

Salary sacrifice means you aren't contributing to the pension, you are agreeing to a lower salary in return for your employer contributing more to your pension.  That is why you don't get any pension tax relief with salary sacrifice - they are employer contributions.

If you check your P60 or payslips you will see that your taxable pay is 3% less than your salary.

catowner123

Ok - so how do I reduce avoid eating into my allowance? Multiple websites simply say pay into your pension, but what does that actually mean in practical terms? 

Dazed_and_C0nfused

You are sacrificing 5% so only have taxable income of £97,850.

If you sacrifice all of your bonus then I'm not sure what the issue is?

Do you have other taxable income not previously mentioned?  Interest or dividends maybe?  Rental income?

catowner123

Ok makes sense. 

I do, but interest is minimal although yes still counts. Dividends are all within ISA’s and I only ever capitalise gains on selling shares under the annual CGT allowance