Pension advice for clueless late 30s

[Deleted User]

Dazed_and_C0nfused said:

2nd_time_buyer said:

MX5huggy said:

Your husband needs to make pension contributions to get his earnings below £50k this tax year so that you don’t have Child Benefit taken off you. 

Does this work? My understanding is that pension contributions do not reduce income/profit, which is what child benefit is based on.

.... unless contributions are via salary sacrifice.

Net pay contributions reduce taxable income but someone who is self employed is going to be paying relief at source contributions.

These don't reduce taxable income (they increase the basic rate tax band) but they do reduce adjusted net income which is what the High Income Child Benefit Charge is based on.

This is very simplistic but if his only taxable income for a year was £55,000 profits from self employment and he paid £4,000 (net) into a relief at source pension (in the same tax year) then this would work out as follows,

Initial cost £4,000
Basic rate tax relief £1,000
Pension fund £5,000

Personal tax saving £946
HICBC avoided (for two kids) £1,827.80
Total personal tax/HICBC saving £2,773.80

Real cost of £5,000 pension fund = £1226.20 

That's exactly the kind of breakdown of needed and how I've thought it would work in my head.

In theory - can we wait until end of tax year and deposit £4k in one go and then sort out remaining tax liability on tax assessment?

In answer regarding the ltd company - his work is primarily with one client in the US as a freelance (remote). He is free to take on other work but currently has only had time to work for the one. We are trying to get advice on how this sits in terms of IR35 for a ltd company as the client is International. We've so far had one lot of advice to say there isn't an issue and it can be set up ltd but I'm cautious and want to get a couple of different professional opinions which we are in the process of.

marlot

>> - Husband s/e sole trader. Think he will start to average around £55k. Not currently contributing at all but want to find out the best option for this and most tax efficient.

With that level of income, you should consider him doing this through a limited company.  There is more admin to do, but advantages for tax planning. 

Dazed_and_C0nfused

Deleted_User said:

Dazed_and_C0nfused said:

2nd_time_buyer said:

MX5huggy said:

Your husband needs to make pension contributions to get his earnings below £50k this tax year so that you don’t have Child Benefit taken off you. 

Does this work? My understanding is that pension contributions do not reduce income/profit, which is what child benefit is based on.

.... unless contributions are via salary sacrifice.

Net pay contributions reduce taxable income but someone who is self employed is going to be paying relief at source contributions.

These don't reduce taxable income (they increase the basic rate tax band) but they do reduce adjusted net income which is what the High Income Child Benefit Charge is based on.

This is very simplistic but if his only taxable income for a year was £55,000 profits from self employment and he paid £4,000 (net) into a relief at source pension (in the same tax year) then this would work out as follows,

Initial cost £4,000
Basic rate tax relief £1,000
Pension fund £5,000

Personal tax saving £946
HICBC avoided (for two kids) £1,827.80
Total personal tax/HICBC saving £2,773.80

Real cost of £5,000 pension fund = £1226.20 

That's exactly the kind of breakdown of needed and how I've thought it would work in my head.

In theory - can we wait until end of tax year and deposit £4k in one go and then sort out remaining tax liability on tax assessment?

In answer regarding the ltd company - his work is primarily with one client in the US as a freelance (remote). He is free to take on other work but currently has only had time to work for the one. We are trying to get advice on how this sits in terms of IR35 for a ltd company as the client is International. We've so far had one lot of advice to say there isn't an issue and it can be set up ltd but I'm cautious and want to get a couple of different professional opinions which we are in the process of.

The pension contribution has to be paid in the tax year in question, you can never backdate pension contributions.  The timing of it will depend on when his accounts year end is, for example if his year end is 30 April then he will know very early on in the tax year what his taxable profit will be.  If it is 31 March he might have to make an educated guess.

The basic rate tax relief will be added to the pension fund by the pension company and the personal saving will be reflected in a reduced Self Assessment liability (it won't be an actual refund to him).  The only possible way for your husband to get the personal benefit is via a Self Assessment return.

My example only relates to someone who is self employed, it wouldn't be work like that for an employee (of a limited company).  In that situation the usual outcome is no pension contributions are made by the individual as it is more tax efficient for the employer to make contributions (which do not attract any tax relief whatsoever as far as the individual is concerned).

But self employment and being director of a limited company are chalk and cheese and you need professional advice really on the pros and cons of it.

[Deleted User]

Dazed_and_C0nfused said:

Deleted_User said:

Dazed_and_C0nfused said:

2nd_time_buyer said:

MX5huggy said:

Your husband needs to make pension contributions to get his earnings below £50k this tax year so that you don’t have Child Benefit taken off you. 

Does this work? My understanding is that pension contributions do not reduce income/profit, which is what child benefit is based on.

.... unless contributions are via salary sacrifice.

Net pay contributions reduce taxable income but someone who is self employed is going to be paying relief at source contributions.

These don't reduce taxable income (they increase the basic rate tax band) but they do reduce adjusted net income which is what the High Income Child Benefit Charge is based on.

This is very simplistic but if his only taxable income for a year was £55,000 profits from self employment and he paid £4,000 (net) into a relief at source pension (in the same tax year) then this would work out as follows,

Initial cost £4,000
Basic rate tax relief £1,000
Pension fund £5,000

Personal tax saving £946
HICBC avoided (for two kids) £1,827.80
Total personal tax/HICBC saving £2,773.80

Real cost of £5,000 pension fund = £1226.20 

That's exactly the kind of breakdown of needed and how I've thought it would work in my head.

In theory - can we wait until end of tax year and deposit £4k in one go and then sort out remaining tax liability on tax assessment?

In answer regarding the ltd company - his work is primarily with one client in the US as a freelance (remote). He is free to take on other work but currently has only had time to work for the one. We are trying to get advice on how this sits in terms of IR35 for a ltd company as the client is International. We've so far had one lot of advice to say there isn't an issue and it can be set up ltd but I'm cautious and want to get a couple of different professional opinions which we are in the process of.

The pension contribution has to be paid in the tax year in question, you can never backdate pension contributions.  The timing of it will depend on when his accounts year end is, for example if his year end is 30 April then he will know very early on in the tax year what his taxable profit will be.  If it is 31 March he might have to make an educated guess.

The basic rate tax relief will be added to the pension fund by the pension company and the personal saving will be reflected in a reduced Self Assessment liability (it won't be an actual refund to him).  The only possible way for your husband to get the personal benefit is via a Self Assessment return.

My example only relates to someone who is self employed, it wouldn't be work like that for an employee (of a limited company).  In that situation the usual outcome is no pension contributions are made by the individual as it is more tax efficient for the employer to make contributions (which do not attract any tax relief whatsoever as far as the individual is concerned).

But self employment and being director of a limited company are chalk and cheese and you need professional advice really on the pros and cons of it.

Thanks. Yes for the time being I'm basing all of this on the assumption he is staying sole trader and then taking additional advice and will see if there are any changes in the future.

And that's what I meant with the self assessment. His financial yr runs in line with the financial tax year so what I meant was waiting until towards the end of March to see where his final figures look to be lying and then depositing in to the pension account in a lump sum and then having this contribution reflected in his s/!!!!!! figures a few weeks later which is what sounds correct.

Alexland

Dazed_and_C0nfused said:

This is very simplistic but if his only taxable income for a year was £55,000 profits from self employment and he paid £4,000 (net) into a relief at source pension (in the same tax year) then this would work out as follows,

Initial cost £4,000
Basic rate tax relief £1,000
Pension fund £5,000

Personal tax saving £946
HICBC avoided (for two kids) £1,827.80
Total personal tax/HICBC saving £2,773.80

Real cost of £5,000 pension fund = £1226.20 

You are usually right about these things but surely if the income was £55k they would only otherwise have to repay 50% of their child benefit entitlement as they would only lose it all at £60k?

[Deleted User]

Also can anyone point me to some kind of 'employer's guide' or simple employer explanation for pension salary sacrifice please?
It's absolutely what I would like to do but as I said, last time I tried I couldn't seem to get this through to my employer. Thanks.

Alexland

Deleted_User said:

Also can anyone point me to some kind of 'employer's guide' or simple employer explanation for pension salary sacrifice please?

https://www.gov.uk/guidance/salary-sacrifice-and-the-effects-on-paye

Dazed_and_C0nfused

Alexland said:

Dazed_and_C0nfused said:

This is very simplistic but if his only taxable income for a year was £55,000 profits from self employment and he paid £4,000 (net) into a relief at source pension (in the same tax year) then this would work out as follows,

Initial cost £4,000
Basic rate tax relief £1,000
Pension fund £5,000

Personal tax saving £946
HICBC avoided (for two kids) £1,827.80
Total personal tax/HICBC saving £2,773.80

Real cost of £5,000 pension fund = £1226.20 

You are usually right about these things but surely if the income was £55k they would only otherwise have to repay 50% of their child benefit entitlement as they would only lose it all at £60k?

Good point, slightly over egged it there!!

AlanP_2

Deleted_User said:

Also can anyone point me to some kind of 'employer's guide' or simple employer explanation for pension salary sacrifice please?
It's absolutely what I would like to do but as I said, last time I tried I couldn't seem to get this through to my employer. Thanks.

Whilst SS can and will save the employer NI costs it isn't such a no-brainer for them as some on here seem to imply, particularly for small companies.

The payroll software must be abler to handle it for a start. If they use a bureau then there may be additional charges for using advanced features. If they do it in house there current package may need to be modified, that could well have a cost.

If one employee wants to do SS at the quoted 5% of £48k pension contributions then the potential saving for the employer is (at 15.05%) £361.20 a year. That does not buy a great deal of IT consultancy to modify a payroll system, and in the employer's view it may be more trouble than it's worth.

Albermarle

In theory - can we wait until end of tax year and deposit £4k in one go and then sort out remaining tax liability on tax assessment?

If you do not want to wait until the last minute , you can add contributions during the year based on an estimate of earnings .

The £4K gets the most benefit due to the higher rate tax relief but if he contributed more it would still get 20% tax relief so would not be an issue.

In meantime he could look into which pension provider to use . As his pot will be on the smaller side , then best to look at SIPP providers that charge a % of the pot, such as Hargreaves Landsdown, Vanguard, Fidelity , AJ Bell etc

Or if he wants something simpler with slightly higher charges he could look at Nutmeg , Wealthify etc

Best SIPP: Build a low cost DIY pension - MoneySavingExpert