Income tax on wage or pension.

peteuk

I am in the situation that allows me to have a pension and still work full time.  Pension is £12K and FT employment £35K.

Last year as I was hoping from job to job, when my pension started I had my Income tax allowance on this.  Which basically meant I paid no PAYEE tax on the pension but 20% on the FT job. 

As of April HMRC have applied my allowance onto my FT employment which means I am now paying 20% tax on my pension.  The way I see it is the £200 I now pay on the pension is off set by the £200 I’m not paying from my wage.   

But is there any benefit from flipping back to having a tax free pension and paying 20% on all I earn?

FatherTireseus

My first thought is your total income remains the same,  whichever source of income your personal allowance is applied to.  You should pay the same amount of tax either way so I can't see any benefit from having your allowance set against your pension.  If there is some benefit one way or the other, I'm sure some more knowledgeable person will be along in due course!

nigelbb

You don't say what age you are but you should consider contributing £7K/year to a SIPP to avoid paying higher rate tax. If over 55 you can immediately withdraw from the SIPP with 25% tax free.

pensionpawn

Consider maximising your salary sacrifice and / or reducing your hours if minimising your tax profile is your aim. We now all pay 33.25% on everything we earn (inc pension) above the PA.

Dazed_and_C0nfused

pensionpawn said:

Consider maximising your salary sacrifice and / or reducing your hours if minimising your tax profile is your aim. We now all pay 33.25% on everything we earn (inc pension) above the PA.

You seem to be assuming NI is payable on pension income.  It isn't.

MX5huggy

nigelbb said:

You don't say what age you are but you should consider contributing £7K/year to a SIPP to avoid paying higher rate tax. If over 55 you can immediately withdraw from the SIPP with 25% tax free.

The OP can only do this if the pension income comes from a DB pension if it is a DC pension the MPAA has been triggered limiting contributions to £4000 per year. If it is a DB pension then putting £7k in a SIPP is a good idea but again if they immediately took anything beyond the 25% tax free MPAA would be triggered stopping them doing it in subsequent years. 

jimi_man

nigelbb said:

You don't say what age you are but you should consider contributing £7K/year to a SIPP to avoid paying higher rate tax. If over 55 you can immediately withdraw from the SIPP with 25% tax free.

Am I missing something? The OP has £12k pension and £35k income, which makes £47k - below the HR limit?

To the OP. I'm in a similar situation. I have a pension (£32k so above the personal allowance) and a salary. For ease I have the personal allowance on my pension and BR on my salary. I work out how much over the HR limit I will be and pay that in to a SIPP either monthly or in a lump sum at the end of the year - or both.

The benefit for me is that the pension is the constant part of my income and will always be there so if I decide to stop working or if I move jobs, then I don't have to do anything. But as others have said you'll end up with the same amount in the end, I just do it because it's far easier.

Silvertabby

When I was still working I applied my tax code to my salary and BR to my pension, as that seemed the most logical way.  Whatever works for you.

pensionpawn

Dazed_and_C0nfused said:

pensionpawn said:

Consider maximising your salary sacrifice and / or reducing your hours if minimising your tax profile is your aim. We now all pay 33.25% on everything we earn (inc pension) above the PA.

You seem to be assuming NI is payable on pension income.  It isn't.

No assumption, I'm aware that pension income doesn't attract NI (at present). I could have phrased that better however I was working on the basis that given the OPs salary and available annual pension, taking the pension and sliding his pay down towards the PA is effectively minimising his tax (& NI) exposure.

Albermarle

Am I missing something? The OP has £12k pension and £35k income, which makes £47k - below the HR limit?

I thought the same, so you are not missing something. 

The OP can still contribute to a pension ( taking into account any MPAA limit mentioned earlier) but as basic rate taxpayer when contributing and when taking the pensions, the tax benefit will be limited to 6.25% .

The exception to this could be if the OP continues working after also receiving the state pension.

It is not clear if the OP already has a workplace pension they are contributing to anyway. If contributions were made by salary sacrifice it would be better to increase these contributions rather than open a separate SIPP. 

femalemonarchfemalecanine

It makes no difference. It used to be that HMRC would allocate your personal allowance to the pension because it was the permanent source, but that seems to not be the case now. So long as you get your allowances somewhere and the rest is taxed at the appropriate rate, basic/higher then it’s as broad as it’s long.