Minimise 40% tax and high income child benefit tax charge

mobro123

Hi All,

I'm looking at a possible pay rise to £58,000 in the next 6 months. I am in LGPS and pay 8.5% contribution and have a student loan plan 1. After putting info into salary calculator I can see I'll be caught by 40% tax. After playing around with the amounts see that if I can my income to £54,000 I won't pay any tax at 40%. Would I be better buying AVCs via salary sacrifice or opening a SIPP contributing x a month and then submitting a tax return? I'm leaning towards AVC as it seems easier but I'd have more flexibility in a SIPP.

Also, we currently get child tax credit (£85ish a month). If I get the pay rise I'll be over £50k so would be liable to the high income child benefit tax charge. Am I right in thinking the only way to avoid this would be to pay £8k into AVCs to bring earnings down below £50k? 

Thanks,
Matt

Pennywise

A choice between AVCs and a SIPP is a bit like comparing apples and bananas.  You can't just look at the tax implications, you have to look at other factors, particularly the "benefits" of each type of pension scheme as different schemes have different benefits, such as surviving spouse benefits, death in service, whether defined contribution or defined benefit, etc.

Dazed_and_C0nfused

It's probably worth you understanding the different methods of contributing as well as they work slightly differently and what you need to do differs.

Your standard LGPS contributions will be net pay, so your salary might be say £58k but your taxable pay, the bit HMRC are interested in, might be just £53k.

Salary sacrifice is where you don't contribute you give up some pay in return for your employer contributing more to your pension.  Very similar to net pay except you avoid paying NI as well as tax with salary sacrifice.

Relief at source is the usual method when paying into a SIPP and you receive pension tax relief on these contributions.  So if you contribute say £1,000 the pension company will add £250 in tax relief giving you a pension fund of £1,250.

These contributions do not reduce your taxable pay.  But they do reduce your adjusted net income, which is what the HICBC is based on.

They also increase your basic rate band so you can pay more tax at 20% and less at 40%.  The exact amount of any personal tax saving depends on your total taxable income.  You don't get an automatic extra 20% just because you are a higher rate payer.

NB.  Child tax credit and Child Benefit are two completely different things, my comments relate to Child Benefit, not tax credits.