Does contributing more to a works pension, lower your annual taxable earnings?

Nesty

Hi All

I have finance question.

I am in PAYE employment and I rent my house out.

I am enrolled in my company works pension scheme, I do self cert for the additional rent income.

If I raised my pension contributions via my employer, would this lower my overall annual taxable earnings, via self cert combing my PAYE pay + rent?

Dazed_and_C0nfused

It all depends on what method you use to contribute.

Do you know what method you use?

The two normal options are,

Net pay

Relief at source

Or salary sacrifice but that means you yourself aren't contributing to the pension.

jamesd

If you have a salary sacrifice or net pay scheme that will lower your taxable earnings. Relief at source schemes won't. Salary sacrifice is where you save NI as well as income tax. Net pay deducts pension contributions before income tax but you still pay NI, saves higher rate tax reclaiming. Relief at source is all after tax money and basic rate relief added inside the pension, claim higher rate from HMRC.

Nesty

Hi
Many thanks for the replies.
All I know is the payment deducted from my pay and made to the pension, then HMRC tax me on what's remaining, though this could be either (Net pay or relief at source) scheme.
I'll enquire on Monday, what scheme is used. 

Dazed_and_C0nfused

jamesd said:

If you have a salary sacrifice scheme that will lower your taxable earnings. Other types won't. Salary sacrifice is where you save NI as well as income tax. Net pay deducts pension contributions before income tax but you still pay NI, saves higher rate tax reclaiming. Relief at source is all after tax money and basic rate relief added inside the pension, claim higher rate from HMRC.

Net pay reduces taxable income, that's the reason there is no higher rate relief to claim as you always get the maximum possible tax relief at the time you are paid.

Dazed_and_C0nfused

Nesty said:

Hi
Many thanks for the replies.
All I know is the payment deducted from my pay and made to the pension, then HMRC tax me on what's remaining, though this could be either (Net pay or relief at source) scheme.
I'll enquire on Monday, what scheme is used. 

That sounds like net pay.  For example you have a salary of £40k and contribute 10% then your taxable pay (the figure that goes on your P60) is only £36k and you have £4k in your pension fund (assuming DC pension scheme).

With relief at source your taxable pay would be £40k but if you paid £4k into a relief at source pension scheme that would have basic rate relief added giving you a pension fund of £5,000.  In this situation your basic rate tax band is increased by £5,000 meaning you can pay more tax at 20% and less at 40% (if you have enough income).

eastcorkram

Dazed_and_C0nfused said:

It all depends on what method you use to contribute.

Do you know what method you use?

The two normal options are,

Net pay

Relief at source

Or salary sacrifice but that means you yourself aren't contributing to the pension.

Does this mean, if my salary was high enough, I could salary sacrifice £40,000 a year, and then pay another £40,000 into a different SIPP??

zagfles

eastcorkram said:

Dazed_and_C0nfused said:

It all depends on what method you use to contribute.

Do you know what method you use?

The two normal options are,

Net pay

Relief at source

Or salary sacrifice but that means you yourself aren't contributing to the pension.

Does this mean, if my salary was high enough, I could salary sacrifice £40,000 a year, and then pay another £40,000 into a different SIPP??

Employer contributions still count for the annual allowance.

Nesty

Ok thanks, sounds like net pay then, as when looking at my P60, the value in the box used for tax purposes was lower than my actual salary. 

So, if I raised my pension contributions via PAYE, it would lower my self cert tax, as the overall annual taxable earnings, be lower? 

Dazed_and_C0nfused

If you contributed more under a net pay arrangement then yes it would reduce your taxable income.

But whether it would reduce the tax payable on other sources such as rental income is impossible to know without full details of your income.

Paying more might mean your taxable pay and rental profit are taxed at 20% or it could mean the rental profits stop being taxed at 40% but tax is all about the detail and it's far too vague to say for certain.

The one certainty is that net pay contributions will reduce your taxable income.

Whereas relief at source contributions, often paid to a personal pension or SIPP as well as some workplace schemes, increase your basic rate band, they don't reduce your taxable income.  Though this can have the same overall impact.

Nesty

ok thanks, I'll ask at work Monday for sure what type of pension it is.
I am not a higher rate tax earner, I just pay the 20% on the combined (PAYE & Self cert). 
Many thanks for the advice