Increasing salary sacrifice into pension to reduce property income liability

Hugocat

Hi all,

I am considering buying a property as a buy to let but am concerned about my tax implications. I have done BTL before but the tax regime and my situation have changed since then.
As I am currently just below the 40% tax threshold in my day job, the income from property would push me well into the higher tax rate and make the idea unviable.

My question is would increasing the amount I put into my pension at work as salary sacrifice lower my tax liability on the rental income?
I have had a good read around, lots of references to unearned income from a rented property not being allowed to be used for pension contributions for tax benefits, but no clear answer to increasing my work pension at source affecting my BTL tax liability.

I was hoping there may be someone who has current experience of this scenario that they could share. Thanks.

lisyloo

Salary sacrifice lowers your salary, so it would put you down into the 20% tax band.

So yes it would acheive what you want assuming your new income + property income are below the higher rate tax band.

I presume you aren't married?

Dazed_and_C0nfused

I think you are maybe over complicating things.

Salary sacrifice won't have any direct impact on your rental income (or profit).

But it will reduce your taxable income.

In which case there could be a knock effect in that you have basic rate band available for other source of taxable income.  Such as rental profits.

Hugocat

Thanks, no not Married.
Yes, trying to ensure that I contribute enough pension to drop enough so that when I declare the rental income on my tax return I'm still inside the 20% bracket.
Not something I can find expressly stated on any .gov tax sources. also my P45s dont show my income after my pension contributions, just the gross taxable pay so hard to determine how it all fits together.
May have to take advice from IFA to square it all up before I commit as its all a bit opaque.

Wicks

I do this.  I have increased my at source pension contributions (plus buy extra holiday days) in my employment via salary sacrifice.  When i do my tax return on line, it only counts my taxable salary after all deductions.

My payslip shows below (example figures):

Basic Pay  2500

Car Allowance +500

Co. Pen EE SS -1500

A/L Bought/Sold -100
Total Earnings      1400

I then pay tax and NI on the 1400/month only

My tax return then has gross salary as £16800 (1400 x 12).

lisyloo

Hugocat said:

Thanks, no not Married.
Yes, trying to ensure that I contribute enough pension to drop enough so that when I declare the rental income on my tax return I'm still inside the 20% bracket.
Not something I can find expressly stated on any .gov tax sources. also my P45s dont show my income after my pension contributions, just the gross taxable pay so hard to determine how it all fits together.
May have to take advice from IFA to square it all up before I commit as its all a bit opaque.

A P45 is what you get when you leave a job.
Do you mean P60 (yearly income?)
On a P60 your gross taxable income will not include salary sacrifice.
Are you certain your pension contributions are being paid by salary sacrifice?

it's extremely easy.
Let say you earn £60K and decide to ask your employer to put £20K in your pension.
You now get £40K salary and £20k pension
For tax purposes you only get £40K and that will be shown on your P60 and the rental income is added for tax band purposes.

You shouldn't need an IFA as this is simple.
I am beginning to wonder if it is salary sacirifce??

Dazed_and_C0nfused

Hugocat said:

Thanks, no not Married.
Yes, trying to ensure that I contribute enough pension to drop enough so that when I declare the rental income on my tax return I'm still inside the 20% bracket.
Not something I can find expressly stated on any .gov tax sources. also my P45s dont show my income after my pension contributions, just the gross taxable pay so hard to determine how it all fits together.
May have to take advice from IFA to square it all up before I commit as its all a bit opaque.

It can't show your pension contributions as you aren't making any.

Salary sacrifice is where you agree to a lower salary in return for your employer contributing more to your pension.

As they are employer contributions you don't receive any pension tax relief on them.  But you avoid paying tax and NI on the salary that you have agreed to forego.

For example salary £50k with 10% sacrificed is £45k taxable pay.

Hugocat

lisyloo said:

A P45 is what you get when you leave a job.
Do you mean P60 (yearly income?)
On a P60 your gross taxable income will not include salary sacrifice.
Are you certain your pension contributions are being paid by salary sacrifice?

it's extremely easy.
Let say you earn £60K and decide to ask your employer to put £20K in your pension.
You now get £40K salary and £20k pension
For tax purposes you only get £40K and that will be shown on your P60 and the rental income is added for tax band purposes.

You shouldn't need an IFA as this is simple.
I am beginning to wonder if it is salary sacirifce??

Yes, thanks, I meant P60, I was expecting my last years pension contributions to show on the P60 but it appears I was wrong with that assumption. Definitely a salary sacrifice scheme though.
I Just couldnt get my head around the fact that if I was to enter that value into my tax return then I would be into the higher tax rate for any further earnings (rental income).
With that I presume that there is a place on the tax return to state pension contributions.

[Deleted User]

Hugocat said:

Thanks, no not Married.
Yes, trying to ensure that I contribute enough pension to drop enough so that when I declare the rental income on my tax return I'm still inside the 20% bracket.
Not something I can find expressly stated on any .gov tax sources. also my P45s dont show my income after my pension contributions, just the gross taxable pay so hard to determine how it all fits together.
May have to take advice from IFA to square it all up before I commit as its all a bit opaque.

What is your ‘Gross taxable pay to date’ on your June payslip? From that we can make a best guess as to how much you would further need to salary sacrifice or contribute to a separate private scheme. An estimate of rental profit would also help.

lisyloo

Hugocat said:

lisyloo said:

A P45 is what you get when you leave a job.
Do you mean P60 (yearly income?)
On a P60 your gross taxable income will not include salary sacrifice.
Are you certain your pension contributions are being paid by salary sacrifice?

it's extremely easy.
Let say you earn £60K and decide to ask your employer to put £20K in your pension.
You now get £40K salary and £20k pension
For tax purposes you only get £40K and that will be shown on your P60 and the rental income is added for tax band purposes.

You shouldn't need an IFA as this is simple.
I am beginning to wonder if it is salary sacirifce??

Yes, thanks, I meant P60, I was expecting my last years pension contributions to show on the P60 but it appears I was wrong with that assumption. Definitely a salary sacrifice scheme though.
I Just couldnt get my head around the fact that if I was to enter that value into my tax return then I would be into the higher tax rate for any further earnings (rental income).
With that I presume that there is a place on the tax return to state pension contributions.

There are no "my" contributions.
If you have asked your employer to sacrifice your salary and instead put money into your pension then they are "their" contributions - the term is "employer contributions" and should show as such on your payslip.

If last years figure puts you close to the higher rate tax band, the the tax efficient thing to do is to ask your employer to increase "their" contributions, sacrifice your salary i.e. lower it. Subject of course to being able to afford it.

No, There is no place on your tax return to put your employer contributions.
They came from your employer and you paid no tax or NI on them so them are completely disassociated from your personal tax position.

Hugocat

Ok, that sounds like as my P60 has 'pay and income income tax details' as 49k (with no mention of pension contributions as explained by Lisyloo) then any additional income  would take me over the threshold.
It seems likely that I would be liable to 40% tax on the BTL. Makes it a non starter then once the additional costs are taken into consideration. Pity.