Pension tax relief impacted by sabbatical?

vamb

Hi - I have a fairly specific query I am hoping someone here can help with.

I currently earn 75k and contribute (via salary exchange) 8% +8% employer to my pension and will do so until the end of the tax year.

I am planning to take a career break later in 2022 and will be unemployed with no income - this will mean for the tax year 22- 23 I will actually be a basic rate tax payer.

Obviously my employer does not know so I am expecting to overpay tax, to be corrected by a P800 in mid 2023.

How would my employer/HMRC manage the extra tax contributions which would already have been added to my pension pot - would this be balanced through the P800?

I am trying to work out which of the following is more beneficial and would appreciate some advice:

1. reduce my pension contributions to the minimum required by my employer (this doesn’t impact the 8% they would contribute) for more cash in hand today and a bigger tax rebate.
2. keep the same contributions but expect the 20% I would ‘owe’ in pension top up to be taken off my rebate
3. Keep the same contributions as for some reason the ‘extra’ 20% wouldn’t be picked up!

I appreciate any advice anyone has - equally if there is any information out there covering this sort of thing I’d appreciate it as I have searched high and low and found nothing!!

Thanks again 

Dazed_and_C0nfused

What method are you using to contribute?

Net pay or relief at source?

Albermarle

Dazed_and_C0nfused said:

What method are you using to contribute?

Net pay or relief at source?

The OP said Salary Exchange, so I assume they meant Salary Sacrifice ?

zagfles

vamb said:

Hi - I have a fairly specific query I am hoping someone here can help with.

I currently earn 75k and contribute (via salary exchange) 8% +8% employer to my pension and will do so until the end of the tax year.

I am planning to take a career break later in 2022 and will be unemployed with no income - this will mean for the tax year 22- 23 I will actually be a basic rate tax payer.

Obviously my employer does not know so I am expecting to overpay tax, to be corrected by a P800 in mid 2023.

How would my employer/HMRC manage the extra tax contributions which would already have been added to my pension pot - would this be balanced through the P800?

I am trying to work out which of the following is more beneficial and would appreciate some advice:

1. reduce my pension contributions to the minimum required by my employer (this doesn’t impact the 8% they would contribute) for more cash in hand today and a bigger tax rebate.
2. keep the same contributions but expect the 20% I would ‘owe’ in pension top up to be taken off my rebate
3. Keep the same contributions as for some reason the ‘extra’ 20% wouldn’t be picked up!

I appreciate any advice anyone has - equally if there is any information out there covering this sort of thing I’d appreciate it as I have searched high and low and found nothing!!

Thanks again 

Assuming "salary exchange" means salary sacrifice, as it almost certainly does...

1 or 2 are what will effectively happen depending what you choose. You are not paying into your pension, you are agreeing to a lower salary in return for your employer paying into your pension. So for the first part of the year while you are working, your salary will be reduced by the amount you choose to sal sac and so you will pay less tax at 40%. You will also pay 2% less NI. But when you claim the tax rebate, there'll be less tax paid at 40% and so a smaller rebate. So in the end, you'd only get 22% total tax and NI relief on your contributions next tax year.

It would be more efficient if you moved pension contributions to this year, eg increased them for the rest of this tax year then reduce them next tax year, while making sure you contribute enough to get the max employers cont.

Marcon

vamb said:

Hi - I have a fairly specific query I am hoping someone here can help with.

I currently earn 75k and contribute (via salary exchange) 8% +8% employer to my pension and will do so until the end of the tax year.

I am planning to take a career break later in 2022 and will be unemployed with no income - this will mean for the tax year 22- 23 I will actually be a basic rate tax payer.

Obviously my employer does not know so I am expecting to overpay tax, to be corrected by a P800 in mid 2023.

How would my employer/HMRC manage the extra tax contributions which would already have been added to my pension pot - would this be balanced through the P800?

I am trying to work out which of the following is more beneficial and would appreciate some advice:

1. reduce my pension contributions to the minimum required by my employer (this doesn’t impact the 8% they would contribute) for more cash in hand today and a bigger tax rebate.
2. keep the same contributions but expect the 20% I would ‘owe’ in pension top up to be taken off my rebate
3. Keep the same contributions as for some reason the ‘extra’ 20% wouldn’t be picked up!

I appreciate any advice anyone has - equally if there is any information out there covering this sort of thing I’d appreciate it as I have searched high and low and found nothing!!

Thanks again 

Salary sacrifice is classed as an employer contribution. Employer contributions are paid gross, so there are no 'extra tax contributions ...already added to your pot' to be managed.