Pension and Tax rebate

71peyman71

Hi.
I am just finding out about pension planning (albeit late, in my late 40s) and have learnt that the more I contribute to my pension, the less tax I pay. So far I have been contributing 5% and my employer 10%. I intend to increase my contribution to 12% soon.

I have also just discovered that I can make a lump sum payment into my pension pot, say 5K, and call the HMRC and get a rebate on that too. I believe the annual threshold is 40K tax free. Can I really just call my pension company (Standard Life) and send them a check to add to my pension and then get a tax rebate?

Is there anywhere here I can read more about this process? I have the option of going through some finance company, but of course they will charge for the service. I thought with some reading and help here I can do that myself. 

Many thanks

QrizB

71peyman71 said:

I am just finding out about pension planning (albeit late, in my late 40s)

Better late than never!

So far I have been contributing 5% and my employer 10%. I intend to increase my contribution to 12% soon.

How are your contributions made? If by salary sacrifice, you save NI too.

I have also just discovered that I can make a lump sum payment into my pension pot, say 5K, and call the HMRC and get a rebate on that too. I believe the annual threshold is 40K tax free. Can I really just call my pension company (Standard Life) and send them a check to add to my pension and then get a tax rebate?

If your payroll contributions are by salary sacrifice, and you earn enough not to fall foul of National Minimum Wage, you'd be better off increasing those instead and supplementing your wages with money from the lump sum.

Someone with more knowledge will be along in due course with more detail on all this.

Dazed_and_C0nfused

I suspect you have got the wrong end of the stick somewhere.

Most people contributing to a pension don't get a tax rebate but they do get either tax relief added to their pension fund or avoid paying tax in the first place.

In both situations, from your perspective, there is no involvement with HMRC either.  It's all sorted by your employer or the pension company.

What method are you using to make your normal contributions, net pay, relief at source or salary sacrifice?

If you contribute to a SIPP or personal pension by lump sum you will get tax relief added.  For example if you pay £2,000 the pension company will add £500 in basic rate tax relief.

How much do you earn each year and are you Scottish resident for tax purposes?

71peyman71

Thanks for your replies.
My contribution is through salary sacrifice. I'm annual salary is 70k so I guess I can afford to sacrifice much more than 5%. I wish I had known sooner.

We had a financial adviser at the company who gave the impression that we can save lump sums into the pension pot and get tax back. We could then put that back into the pension pot or whatever.

Bimbly

Here's a good place to start:
https://www.moneyhelper.org.uk/en/pensions-and-retirement

Dazed_and_C0nfused

71peyman71 said:

Thanks for your replies.
My contribution is through salary sacrifice. I'm annual salary is 70k so I guess I can afford to sacrifice much more than 5%. I wish I had known sooner.

We had a financial adviser at the company who gave the impression that we can save lump sums into the pension pot and get tax back. We could then put that back into the pension pot or whatever.

Salary sacrifice is very simple.  You are agreeing to a reduced salary in return for your employer contributing more to your pension.  As they are employer contributions you don't get any pension tax relief and there is nothing for you to claim from HMRC.

But you avoid paying tax and National Insurance on the salary you have given up.

With a personal contribution (lump sum or regular) you pay the net amount and the pension company adds 25% to that, courtesy of HMRC.  If you are still paying some 40% tax after the salary sacrifice then you may be able to claim a rebate from HMRC as the gross contribution you have paid increases your basic rate tax band.

With your level of income increasing salary sacrifice contributions is usually seen as the better option over personal contributions.

QrizB

71peyman71 said:

We had a financial adviser at the company who gave the impression that we can save lump sums into the pension pot and get tax back. We could then put that back into the pension pot or whatever.

He's right, BUT you'll still be better off increasing your salary sacrifice.

The cash in youre bank account you've already paid tax & NI on. when you pay it into your pension you'll benefit from tax relief but will still have lost the NI.

If you can make payments by salsac, you'll save the NI too.

My contribution is through salary sacrifice. I'm annual salary is 70k so I guess I can afford to sacrifice much more than 5%. I wish I had known sooner.

OK, so in very round terms you've been sacrificing 5% of your salary (£3.5k pa) and your employer has been paying a total of 15% (£10.5k pa) into your pension. Per the MSE calculator your take-home will be around £47.1k.

Assuming you've made no other pension contributions your total annual contributions for the past three years will have been £10.5k and you'll have £29.5k of annual allowance spare.

If you could afford to, you could bump up your salsac to roughly 70% (£49k). Plus your employer's 10% that's £56k into your pension. £40k of that will fill this year's annual allowance and the remaining £16k will use up part of the spare from 2019-20. Your post-salsac salarry will fall to £21k but, because of tax and NI savings, your take home will only fall by to £17.8k. Those extra £45.5k in your pension will cost you £29.3k in your pocket and you can make this up from your savings.

If you have enough savings you could do the same next year *and* the year after, putting £168k into your pension total.

If you have enough savings that you want to add more than £29.3k x3, you could add *another* £10.8k (ie. £(29.5-16)k x 0.8) each year to use up all of your annual allowances from 2019-20, 2020-21 and 2021-22.

All of the above is in round terms and you will need to check it with your actual salary, pension contribution etc. figures.

71peyman71

QrizB said:

71peyman71 said:

We had a financial adviser at the company who gave the impression that we can save lump sums into the pension pot and get tax back. We could then put that back into the pension pot or whatever.

He's right, BUT you'll still be better off increasing your salary sacrifice.

The cash in youre bank account you've already paid tax & NI on. when you pay it into your pension you'll benefit from tax relief but will still have lost the NI.

If you can make payments by salsac, you'll save the NI too.

My contribution is through salary sacrifice. I'm annual salary is 70k so I guess I can afford to sacrifice much more than 5%. I wish I had known sooner.

OK, so in very round terms you've been sacrificing 5% of your salary (£3.5k pa) and your employer has been paying a total of 15% (£10.5k pa) into your pension. Per the MSE calculator your take-home will be around £47.1k.

Assuming you've made no other pension contributions your total annual contributions for the past three years will have been £10.5k and you'll have £29.5k of annual allowance spare.

If you could afford to, you could bump up your salsac to roughly 70% (£49k). Plus your employer's 10% that's £56k into your pension. £40k of that will fill this year's annual allowance and the remaining £16k will use up part of the spare from 2019-20. Your post-salsac salarry will fall to £21k but, because of tax and NI savings, your take home will only fall by to £17.8k. Those extra £45.5k in your pension will cost you £29.3k in your pocket and you can make this up from your savings.

If you have enough savings you could do the same next year *and* the year after, putting £168k into your pension total.

If you have enough savings that you want to add more than £29.3k x3, you could add *another* £10.8k (ie. £(29.5-16)k x 0.8) each year to use up all of your annual allowances from 2019-20, 2020-21 and 2021-22.

All of the above is in round terms and you will need to check it with your actual salary, pension contribution etc. figures.

Thank you for the explanation. I think I understand now. 
And looking at my pension pot on my account, your calculation is about right.
I don't think I can ramp up my salsac to 70% though, as I will have hardly any income for monthly bills, mortgage etc. I have modest savings. My child maintenance payments will likely go up from autumn too.

71peyman71

I use the salary calculator here https://www.thesalarycalculator.co.uk/salary.php

In the pension tab, the default is Auto-enrolment. Is this correct or should I check the Salary Sacrifice button? 
My take home is far lower with the latter!

Marcon

71peyman71 said:

Thanks for your replies.
My contribution is through salary sacrifice. I'm annual salary is 70k so I guess I can afford to sacrifice much more than 5%. I wish I had known sooner.

We had a financial adviser at the company who gave the impression that we can save lump sums into the pension pot and get tax back. We could then put that back into the pension pot or whatever.

In fairness, that's not wrong if you are a higher rate taxpayer and make personal contributions on a lump sum basis to the pension provider. They'll claim the basic rate tax relief on your behalf and add that to your pot (assuming you are in a defined contribution arrangement); you can then claim higher rate tax relief and that comes back to you. You can only claim higher rate relief on pension contributions to the extent you've paid higher rate tax in the first place.

JoeCrystal

71peyman71 said:

I use the salary calculator here https://www.thesalarycalculator.co.uk/salary.php

In the pension tab, the default is Auto-enrolment. Is this correct or should I check the Salary Sacrifice button? 
My take home is far lower with the latter!

The purpose behind that auto-enrolment option was to ignore the first £6,240 per year so the employee and employers' percentage contribution can be calculated above that up to a specific high amount. So a person earning £1,040 in a month can only expect £15.50 from their employer as bare minimum