Increase pension contributions and live off savings

Dazed_and_C0nfused

DATMAN_2 said:

Hi 

So is the £40000 annual allowance before or after the 25% tax relief

So you can contribute £3333.33 per month and you get £833.33 tax relief ?

Also does the employer contribution count towards the £40,000?

Would be a good way to quickly build up a pension pot !

thanks 

If you personally contribute £3333.33 using the "relief at source" method then yes £833.33 will be added to your pension fund, making a gross contribution of £4,166.66.

All of which counts towards the annual allowance.

The situation would be very different if you used an alternative method of contributing.

DATMAN_2

Dazed_and_C0nfused said:

DATMAN_2 said:

Hi 

So is the £40000 annual allowance before or after the 25% tax relief

So you can contribute £3333.33 per month and you get £833.33 tax relief ?

Also does the employer contribution count towards the £40,000?

Would be a good way to quickly build up a pension pot !

thanks 

If you personally contribute £3333.33 using the "relief at source" method then yes £833.33 will be added to your pension fund, making a gross contribution of £4,166.66.

All of which counts towards the annual allowance.

The situation would be very different if you used an alternative method of contributing.

Hi what do you mean by alternative method of contributing?

also what would the impact be on NI contributions if I did this?

Dazed_and_C0nfused

With relief at source there is no NI benefit, there never is when you contribute.

There are three standard methods of you contributing and they all work slightly differently.

Relief at source

Net pay

Lump sum with no tax relief at point of payment (usually large payments to public sector schemes)

There is also salary sacrifice, where you don't contribute, you agree to a reduced salary in return for your employer contributing more.  As these are employer contributions there is no pension tax relief but they are tax (and NI) efficient in other ways.

DATMAN_2

Dazed_and_C0nfused said:

With relief at source there is no NI benefit, there never is when you contribute.

There are three standard methods of you contributing and they all work slightly differently.

Relief at source

Net pay

Lump sum with no tax relief at point of payment (usually large payments to public sector schemes)

There is also salary sacrifice, where you don't contribute, you agree to a reduced salary in return for your employer contributing more.  As these are employer contributions there is no pension tax relief but they are tax (and NI) efficient in other ways.

So the tax at source uplift counts a towards the £40k allowance.

Could you please clarify how the salary sacrifice would be more tax and Ni efficient then getting the 25% relief and the additional 15% annual allowance? 

Say earnings of £60k per annum thanks 

Dazed_and_C0nfused

You don't get any extra annual allowance.

If you sacrificed £3333.33 then your employer would pay that into your pension fund and as an employer contribution nothing is added so you have a fund of £3333.33

But you wouldn't pay any tax or NI on the £3333.33 as you have agreed not to be paid it.

On £60,000 you would usually avoid 40% tax and 2% NI on the £3333.33

Remember with relief at source you would probably get a personal tax saving of £833 by contributing £4,166 (gross).  This personal tax saving does not count towards your annual allowance.

Albermarle

So is the £40000 annual allowance before or after the 25% tax relief

It includes anything that actually goes into your pension, including any tax relief or employer contributions.

mat1964

I am thinking if I give in my notice of increasing contributions via salary sacrifice for the 6 month notice period to 60%.  The would take me a little over 21/22 allowance, but I can carry some forward.  I would then use £20k of my £40k allowance for 22/23 by the time I left.  I assume I could then pay another £16k in as a one off contribution as long as my earnings for 21/22 were in excess of £40k and the provider would apply the basic rate tax relief of £4k?  Would that need to be done before I left the job or just by the end of the tax year?

AlanP_2

mat1964 said:

I am thinking if I give in my notice of increasing contributions via salary sacrifice for the 6 month notice period to 60%.  The would take me a little over 21/22 allowance, but I can carry some forward.  I would then use £20k of my £40k allowance for 22/23 by the time I left.  I assume I could then pay another £16k in as a one off contribution as long as my earnings for 21/22 were in excess of £40k and the provider would apply the basic rate tax relief of £4k?  Would that need to be done before I left the job or just by the end of the tax year?

It must be done BEFORE you take any taxable pension income from a DC pot and in the tax year. Once you have taken even 1p of taxable DC pension income you are limited by the MPAA to £4k a year additional DC contributions.