Naive (or plain stupid) Question

zagfles

sgx2000 said:

michaels said:

You cancontribute as much as you earn up to 40k. Depending on your contribution method you can claim tax releif on all your contributions, even bits in your personal allowance on which you pay no tax. Reducing your income may also give you access to certain benefits. 

Hi
Would the tax relief have to be applied for by me,,, or would Aviva automatically ask for it?

Again please be patient I am just on the start of my journey to retirement 

Have you got a booklet or website etc about your workplace pension? They work differently. What does yours say about putting extra into your pension?

saucer

zagfles said:

sgx2000 said:

michaels said:

You cancontribute as much as you earn up to 40k. Depending on your contribution method you can claim tax releif on all your contributions, even bits in your personal allowance on which you pay no tax. Reducing your income may also give you access to certain benefits. 

Hi
Would the tax relief have to be applied for by me,,, or would Aviva automatically ask for it?

Again please be patient I am just on the start of my journey to retirement 

Have you got a booklet or website etc about your workplace pension? They work differently. What does yours say about putting extra into your pension?

Good point…I’m thinking private pension. Bottom line though for work or private pension is that money into a pension, especially when you’re getting close to accessing it through retirement, is generally a very good idea. You are avoiding income tax now and, although you are subject to income tax on pension income, this will probably be lower because of lower income. There is also the potential benefit of some growth in the pension. 

k_man

jimi_man said:

You can only pay up to your earnings into a pension, in any tax year - so a maximum of £37k minus whatever is paid into your pension. So £3200 (plus any contributions by you?) will reduce that down even further.

Depends how the £3200 is paid/sourced.
Employer contributions don't count towards the income limit (£37k here, possibly....) only the 40k limit.

jimi_man said:

You can however use previous years allowances - hopefully someone more knowledgeable will be along to explain that in more detail!

Even with carry forward, the limit is still income that tax year. So generally carry forward doesn't apply if earning less than £40k.

sgx2000

xylophone said:

Workplace pension is with Aviva - a managed fund
Company pays in £3200 per year

Do you mean that you make no personal contribution (this is a salary sacrifice arrangement whereby the company pays the whole as a company contribution)?

Yes.  I make no contribution (and cant) 
As far as I'm aware it is not salary sacrifice..  It Pre-dates that??? 
 It is just a non contributory pension (but I'm Probably wrong..lol)

At some point, in the not too distant future, I will post my retirement spreadsheet for everyone's advice....

sgx2000

zagfles said:

sgx2000 said:

michaels said:

You cancontribute as much as you earn up to 40k. Depending on your contribution method you can claim tax releif on all your contributions, even bits in your personal allowance on which you pay no tax. Reducing your income may also give you access to certain benefits. 

Hi
Would the tax relief have to be applied for by me,,, or would Aviva automatically ask for it?

Again please be patient I am just on the start of my journey to retirement 

Have you got a booklet or website etc about your workplace pension? They work differently. What does yours say about putting extra into your pension?

The Aviva website says I can add to the pension by bacs

Secret2ndAccount

Suppose you earned an extra £100 this month. You would pay an extra £14 in NI and £20 in tax.  Your take home would be £66.  Now suppose you paid that money into a pension. There are three possibilities:

Method 1: You pay the £66 into your pension. The taxman gives you a bonus of 25%, that’s £16.50. So the pension grows by £82.50

Method 2: Your employer deducts the NI of £14 leaving £86, then pays the £86 into the pension. You don’t pay any income tax, so you don’t get anything added.

Method 3: Salary Scarifice: Your employer never pays you the £100. They pay it into the pension. The pension increases by £100. Your earnings stay the same, so there is no tax or NI involved.

So, for the loss of £66 in your pocket, you have somewhere between £82.50 and £100 in your pension.

When you take it out, you get the first 25% tax free. The rest is treated as income, so you probably pay tax. There is no NI on pensions. Let’s take Method 2 above, and say there is £86 in the pot. You get £21.50 free, and pay 20% on £64.50, leaving £51.60. Total out = £73.10

Here’s a table of the 3 methods:               

	Take home  foregone	In the  pension	25% tax  free	tax bill	Total   Received
Method 1	66	82.50	20.63	12.38	70.13
Method 2	66	86	21.50	12.90	73.10
Method 3	66	100	25.00	15.00	85.00

 

So if, over the next two years, you feed 40k into your pension, you will turn it into an after tax pension of between £42,500 and £51,500       All are worth doing – it’s pretty much money for nothing – but it would be good to find out which method your employer is using.

If you earn 37k, the most that can go into your pension in a year is 37k – total from all sources. So you can add quite a bit this year, on top of what you and your employer already pay. Put the rest in next year. If it’s method 3, it will be a bit more tricky. You can’t sacrifice away all your salary – they have to pay you minimum wage. So maybe it would take 3 years to feed in the whole 40k in that case.

michaels

Secret2ndAccount said:

Suppose you earned an extra £100 this month. You would pay an extra £14 in NI and £20 in tax.  Your take home would be £66.  Now suppose you paid that money into a pension. There are three possibilities:

Method 1: You pay the £66 into your pension. The taxman gives you a bonus of 25%, that’s £16.50. So the pension grows by £82.50

Method 2: Your employer deducts the NI of £14 leaving £86, then pays the £86 into the pension. You don’t pay any income tax, so you don’t get anything added.

Method 3: Salary Scarifice: Your employer never pays you the £100. They pay it into the pension. The pension increases by £100. Your earnings stay the same, so there is no tax or NI involved.

So, for the loss of £66 in your pocket, you have somewhere between £82.50 and £100 in your pension.

When you take it out, you get the first 25% tax free. The rest is treated as income, so you probably pay tax. There is no NI on pensions. Let’s take Method 2 above, and say there is £86 in the pot. You get £21.50 free, and pay 20% on £64.50, leaving £51.60. Total out = £74.10

Here’s a table of the 3 methods:               

	Take home  foregone	In the  pension	25% tax  free	tax bill	Total   Received
Method 1	66	82.50	20.63	12.38	70.13
Method 2	66	86	21.50	12.90	73.10
Method 3	66	100	25.00	15.00	85.00

 

So if, over the next two years, you feed 40k into your pension, you will turn it into an after tax pension of between £42,500 and £51,500       All are worth doing – it’s pretty much money for nothing – but it would be good to find out which method your employer is using.

If you earn 37k, the most that can go into your pension in a year is 37k – total from all sources. So you can add quite a bit this year, on top of what you and your employer already pay. Put the rest in next year. If it’s method 3, it will be a bit more tricky. You can’t sacrifice away all your salary – they have to pay you minimum wage. So maybe it would take 3 years to feed in the whole 40k in that case.

If you go down below the personal tax allowance into a sipp you can still get the 25% uplift even though you did not pay any tax in the first place and may qualify for income dependent benefits.

zagfles

Secret2ndAccount said:

Suppose you earned an extra £100 this month. You would pay an extra £14 in NI and £20 in tax.  Your take home would be £66.  Now suppose you paid that money into a pension. There are three possibilities:

Method 1: You pay the £66 into your pension. The taxman gives you a bonus of 25%, that’s £16.50. So the pension grows by £82.50

Method 2: Your employer deducts the NI of £14 leaving £86, then pays the £86 into the pension. You don’t pay any income tax, so you don’t get anything added.

Method 3: Salary Scarifice: Your employer never pays you the £100. They pay it into the pension. The pension increases by £100. Your earnings stay the same, so there is no tax or NI involved.

So, for the loss of £66 in your pocket, you have somewhere between £82.50 and £100 in your pension.

When you take it out, you get the first 25% tax free. The rest is treated as income, so you probably pay tax. There is no NI on pensions. Let’s take Method 2 above, and say there is £86 in the pot. You get £21.50 free, and pay 20% on £64.50, leaving £51.60. Total out = £73.10

Here’s a table of the 3 methods:               

	Take home  foregone	In the  pension	25% tax  free	tax bill	Total   Received
Method 1	66	82.50	20.63	12.38	70.13
Method 2	66	86	21.50	12.90	73.10
Method 3	66	100	25.00	15.00	85.00

 

So if, over the next two years, you feed 40k into your pension, you will turn it into an after tax pension of between £42,500 and £51,500       All are worth doing – it’s pretty much money for nothing – but it would be good to find out which method your employer is using.

If you earn 37k, the most that can go into your pension in a year is 37k – total from all sources. So you can add quite a bit this year, on top of what you and your employer already pay. Put the rest in next year. If it’s method 3, it will be a bit more tricky. You can’t sacrifice away all your salary – they have to pay you minimum wage. So maybe it would take 3 years to feed in the whole 40k in that case.

This is sort of right but a few errors/approximations, and it makes no sense that methods 1 (RAS) and 2 (net pay) give different results. They should be the same unless taxable pay goes below the personal allowance. The relief is the same.

NI is 13.25% rather than 14%, but asides from that, if you pay in £86 to a "net pay" (ie method 2) pension, the take home pay foregone for a basic rate taxpayer is £68.80 not £66. You save 20% tax, NI is unaffected.

The statement that "If you earn 37k, the most that can go into your pension in a year is 37k – total from all sources" is wrong. It causes so much confusion and misunderstanding here, even IFAs get it wrong. The tax relief limit is 100% of earnings. You don't get tax relief on employer contributions. If OP earns £37k, then the total he/she can put into a pension is £37k, but employer contributions can be paid on top of this. Employer contributions count for the annual allowance, but not the tax relief limit.

So assuming a start point of OP earning £37k, zero employee conts and employer conts £3200.

Method 1 (RAS) OP could pay in £29600 net in which will be grossed up to £37000. Total into the pension £40,200. Slightly over the annual allowance, but OP will almost certainly have some carry forwards available. (again, this demonstrates the other often quoted wrong statement that you can't use carry forwards if you earn under £40k. You can.)

Method 2 (net pay) OP could pay in £24430, taking taxable income down to £12570. Paying more would get no tax relief. Net cost in take home pay reduction would be £19544

Method 3 (sal sac) OP could pay in around £17k to keep salary above min wage (assuming 40h week). Net cost in take home pay reduction would be £11347

Might be possible to do a combination, but whatever method(s) are used it'll take 2-4 years to pay the full £40k net in.

Make sure stuff like like taxable benefits/tax reliefs are accounted for if getting close to the limits, for instance if claiming the working at home allowance on a £37k salary, taxable income is reduced to £36688