I started contributing into my pension but monthly tax remained the same

london21

Hi All,

I am 31 and had previously paused contributing into my pension because my current employer contributed 8% and  I was already paying monthly student loan.

I contacted the HR person at work and informed them that I will like to start contributing to my pension.
She asked what the net amount i will like to contribute is and to start with i stated £240 per month.
I recently got paid and upon checking take home pay calculator, i realised my tax had not gone down it stayed the same.
I am not sure who to contact, do i contact the HR person at my workplace or HMRC directly?

I am a higher rate tax payer. Based on take home pay's calculation showing that my monthly tax bill should have gone down £96.
NI and student loan matched what the take home pay calculator said it should be except the monthly tax amount and my take home pay. 

Also just curious, years later when i retire, is tax paid on monthly pension income payment? I was reading somewhere sbout  lifetime allowance which is currently £1,073,100.

Dazed_and_C0nfused

Why do you think you would pay less tax?

If this is a relief at source pension then you pay the same tax but your £240 gets 25% added in the pension fund and becomes £300.

There may be some higher rate tax relief due but that is subject to a tax code change which is upto you to sort out, not your employer.

And yes pension income is taxable.  With a DC pot you can have 25% TFLS but the other 75% is taxable.  The amount of tax payable depends on your total taxable income each year (and what type of income, pension, earnings, savings interest etc).

[Deleted User]

The lifetime allowance is an entirely different tax. It is a limit on the size of the pension pot (from which your pension is paid and taxed) and ending up with an amount exceeding that cap attracts punitive tax.

https://www.gov.uk/tax-on-your-private-pension/lifetime-allowance

london21

Dazed_and_C0nfused said:

Why do you think you would pay less tax?

If this is a relief at source pension then you pay the same tax but your £240 gets 25% added in the pension fund and becomes £300.

There may be some higher rate tax relief due but that is subject to a tax code change which is upto you to sort out, not your employer.

And yes pension income is taxable.  With a DC pot you can have 25% TFLS but the other 75% is taxable.  The amount of tax payable depends on your total taxable income each year (and what type of income, pension, earnings, savings interest etc).

I might have read too many articles and confused myself.

I was reading online that pension contribution could help towards reducing tax as a higher tax rate earner.

Some of my income is taxed at 40% so thought i might as well start putting something into my pension.

I calculated my income based on the pension contribution and does not seem right. I know sometimes HMRC send a rebate but those are usually a year after. 

I think my employer uses the net pay arrangement, therefore the money towards pension should not be taxed but the £240 I contributed incurred tax of £96.

I will call HMRC tomorrow morning. 

It will be strange to pay the 40% tax on pension contribution and upon retiring also pay tax again.

london21

[Deleted User] said:

The lifetime allowance is an entirely different tax. It is a limit on the size of the pension pot (from which your pension is paid and taxed) and ending up with an amount exceeding that cap attracts punitive tax.

https://www.gov.uk/tax-on-your-private-pension/lifetime-allowance

Thanks for clarifying. I have over researched about pension and started confusing myself.

Makes sense now. 

[Deleted User]

london21 said:

Dazed_and_C0nfused said:

Why do you think you would pay less tax?

If this is a relief at source pension then you pay the same tax but your £240 gets 25% added in the pension fund and becomes £300.

There may be some higher rate tax relief due but that is subject to a tax code change which is upto you to sort out, not your employer.

And yes pension income is taxable.  With a DC pot you can have 25% TFLS but the other 75% is taxable.  The amount of tax payable depends on your total taxable income each year (and what type of income, pension, earnings, savings interest etc).

I might have read too many articles and confused myself.

I was reading online that pension contribution could help towards reducing tax as a higher tax rate earner.

Some of my income is taxed at 40% so thought i might as well start putting something into my pension.

I calculated my income based on the pension contribution and does not seem right. I know sometimes HMRC send a rebate but those are usually a year after. 

I think my employer uses the net pay arrangement, therefore the money towards pension should not be taxed but the £240 I contributed incurred tax of £96.

I will call HMRC tomorrow morning. 

It will be strange to pay the 40% tax on pension contribution and upon retiring also pay tax again.

You ARE confused. You get 40% RELIEF on your contributions. 

You contribute £240 per month - £2880 per annum. The government makes this up to £3600 (your 20% tax relief)  You claim an additional 20% on the £3600 contribution. This is £720. 

So £3600 is in your pot and you have paid £2880 less the higher rate relief of £720  = £2160.

Dazed_and_C0nfused

london21 said:

Dazed_and_C0nfused said:

Why do you think you would pay less tax?

If this is a relief at source pension then you pay the same tax but your £240 gets 25% added in the pension fund and becomes £300.

There may be some higher rate tax relief due but that is subject to a tax code change which is upto you to sort out, not your employer.

And yes pension income is taxable.  With a DC pot you can have 25% TFLS but the other 75% is taxable.  The amount of tax payable depends on your total taxable income each year (and what type of income, pension, earnings, savings interest etc).

I might have read too many articles and confused myself.

I was reading online that pension contribution could help towards reducing tax as a higher tax rate earner.

Some of my income is taxed at 40% so thought i might as well start putting something into my pension.

I calculated my income based on the pension contribution and does not seem right. I know sometimes HMRC send a rebate but those are usually a year after. 

I think my employer uses the net pay arrangement, therefore the money towards pension should not be taxed but the £240 I contributed incurred tax of £96.

I will call HMRC tomorrow morning. 

It will be strange to pay the 40% tax on pension contribution and upon retiring also pay tax again.

I would recommend being 100% certain of what is happening before contacting HMRC otherwise you could get in a bit of a pickle!

If they operate a net pay scheme then there is no tax relief to claim from HMRC, you get the maximum possible benefit on your payslip each month.

That doesn't seem to be the case so if it is relief at source you should see the basic rate tax relief added to your pension fund and the gross contribution also increases your basic rate tax band meaning more income can be taxed at 20% and less at 40%.  You need to contact HMRC to sort out the higher rate tax relief, which can be allowed during the tax year via an increased tax code.

The other option is salary sacrifice however that is where you don't contribute to a pension, you agree to a lower salary in return for your employer contributing to the pension.  There is no pension tax relief due with salary sacrifice and you never need to mention it to HMRC.

london21

Dazed_and_C0nfused said:

london21 said:

Dazed_and_C0nfused said:

Why do you think you would pay less tax?

If this is a relief at source pension then you pay the same tax but your £240 gets 25% added in the pension fund and becomes £300.

There may be some higher rate tax relief due but that is subject to a tax code change which is upto you to sort out, not your employer.

And yes pension income is taxable.  With a DC pot you can have 25% TFLS but the other 75% is taxable.  The amount of tax payable depends on your total taxable income each year (and what type of income, pension, earnings, savings interest etc).

I might have read too many articles and confused myself.

I was reading online that pension contribution could help towards reducing tax as a higher tax rate earner.

Some of my income is taxed at 40% so thought i might as well start putting something into my pension.

I calculated my income based on the pension contribution and does not seem right. I know sometimes HMRC send a rebate but those are usually a year after. 

I think my employer uses the net pay arrangement, therefore the money towards pension should not be taxed but the £240 I contributed incurred tax of £96.

I will call HMRC tomorrow morning. 

It will be strange to pay the 40% tax on pension contribution and upon retiring also pay tax again.

I would recommend being 100% certain of what is happening before contacting HMRC otherwise you could get in a bit of a pickle!

If they operate a net pay scheme then there is no tax relief to claim from HMRC, you get the maximum possible benefit on your payslip each month.

That doesn't seem to be the case so if it is relief at source you should see the basic rate tax relief added to your pension fund and the gross contribution also increases your basic rate tax band meaning more income can be taxed at 20% and less at 40%.  You need to contact HMRC to sort out the higher rate tax relief, which can be allowed during the tax year via an increased tax code.

The other option is salary sacrifice however that is where you don't contribute to a pension, you agree to a lower salary in return for your employer contributing to the pension.  There is no pension tax relief due with salary sacrifice and you never need to mention it to HMRC.

I will need to confirm with the HR person at work if they use the net pay scheme method, definitely not the salary sacrifice.

The HR person only asked for the net amount i will like to contribute so i suspect it is the net pay scheme.

"If they operate a net pay scheme then there is no tax relief to claim from HMRC, you get the maximum possible benefit on your payslip each month."

"That doesn't seem to be the case so if it is relief at source you should see the basic rate tax relief added to your pension fund and the gross contribution also increases your basic rate tax band meaning more income can be taxed at 20% and less at 40%.  You need to contact HMRC to sort out the higher rate tax relief, which can be allowed during the tax year via an increased tax code."

I checked the fund online and called them they said takes some time to reflect. Hopefully next week will see what the £240 contribution is showing as in my portfolio.

More income can be taxed at 20% and less at 40% - this is exactly what I will like to achieve. Just feels like all my income is going PAYE Tax, NIC, and Student Loan. I got a discretionary bonus in May and that was when i realised i needed to be more tax efficient, after all deductions only got paid 53%. 

Thanks for your response. 

london21

Update: this has now been sorted.

I contacted HMRC this morning and they clarified that  I needed to apply for personal pension relief.
They have amended my tax code now so Yes will be paying slighly less tax.
They have said if increasing or decreasing pension contribution to contact them to amend accordingly. 

Dazed_and_C0nfused

HMRC only react to what you tell them.

Hopefully this isn't true otherwise you will end up owing a chunk of tax back to HMRC in due course,

I think my employer uses the net pay arrangement

london21

Dazed_and_C0nfused said:

HMRC only react to what you tell them.

Hopefully this isn't true otherwise you will end up owing a chunk of tax back to HMRC in due course,

I think my employer uses the net pay arrangement

Its a small amount tbh. I called them and explained the situation. They only amended my tax code by a little.

I used this website https://www.thesalarycalculator.co.uk/salary.php and looks right.