Increasing salary sacrifice into pension to reduce property income liability

lisyloo

can you explain what is on your payslip
is your “pay” £49k/12 And then pension deducted aftewards
OR
is your taxable pay £49k/12 minus pension

either way you can still do what you want.

if you don’t have proper salary sacrifice then you have to notify HMRC of your pension contributions to get higher rate tax relief.
you'd probably be doing self assessment.
so you can still achieve it, albeit it might be in arrears.

Albermarle

Hugocat said:

Yes, I am very confused now.
My employers scheme says all over it 'Salary sacrifice', I do contribute into it and I can see the funds taken out on my payslips and when I log into my pension account I can see the funds going in there along with the employer contribution.
My P60 says 49k which is my annual gross.
so am I to take it that the scheme is not salary sacrifice? (although the organisation says it is) or my P60 is wrong?
I have done all the numbers regarding affordability and expenses, access to funds at 55 etc, I have done BTL before so am  familiar but was not in a position where It would put me into 40% bracket which is the Key issue.

There is definitely something wrong here. If it was a salary sacrifice scheme for pension contributions, you do NOT see any pension contributions coming out of your payslip. So maybe your company is making some mistake. There are three ways to make regular pension contributions when you are an employee.

1) Salary sacrifice - you get a lower salary and the employer makes all the contribution for you ( including their own)

2) Net pay ( confusing name ) - as the contribution is taken out of your salary before tax is taken

3) Relief at source- the contribution is taken out of your taxed salary and the pension provider adds the tax relief.

With the first two all tax relief is automatically OK.

It it is the third one the pension provider adds basic rate tax relief ( you will be able to see this if you have online access to the pensions ) and you have to claim the higher rate relief. You will see both your and the employer contributions being made separately

If it is the second one, you will see your pension getting two separate contributions as above, but no tax relief added.

If it is salary sacrifice , you would just see an employer contribution and no tax relief being added. 

Hugocat

Thanks for the advice, it seems that due to quite a few variables last year, when I looked at my P60 I thought it hadn't taken the SS contributions off but actually as I did earn more in that year than normal so my income was higher than I'd realised . The pension contributions were taken off and the P60 did indeed only show the amount after the pension contributions.

lisyloo

That’s good but as you note if you get rises, overtime or bonuses then it will impact.
its not so bad if the employer is flexible.
ive had those who only let you change once a year which I get with thousands of employees.

LoanCrapShooter

Hi all, came across this thread whilst researching the following query...

If your salary is higher rate, and you wish to make sufficient pension contributions to avoid paying the higher tax on both your salary and rental profits, then in lieu of the Salary Sacrifice approch can you make pension contributions into a SIPP and sort it on your tax return? 

Example:

£60k salary
Deposit £15k into a SIPP
Pay basic rate only on £5k rental profits

Thanks in advance! 😊

Ferro

LoanCrapShooter said:

Hi all, came across this thread whilst researching the following query...

If your salary is higher rate, and you wish to make sufficient pension contributions to avoid paying the higher tax on both your salary and rental profits, then in lieu of the Salary Sacrifice approch can you make pension contributions into a SIPP and sort it on your tax return? 

Example:

£60k salary
Deposit £15k into a SIPP
Pay basic rate only on £5k rental profits

Thanks in advance! 😊

You wouldn’t need to deposit £15000. If you deposited £12000 that would be grossed up to £15000 as a result of the provider claiming basic rate tax relief. 

You would then need to notify HMRC in order to benefit from the additional 20% relief on the £15000. 

LoanCrapShooter

Ferro said:

LoanCrapShooter said:

Hi all, came across this thread whilst researching the following query...

If your salary is higher rate, and you wish to make sufficient pension contributions to avoid paying the higher tax on both your salary and rental profits, then in lieu of the Salary Sacrifice approch can you make pension contributions into a SIPP and sort it on your tax return? 

Example:

£60k salary
Deposit £15k into a SIPP
Pay basic rate only on £5k rental profits

Thanks in advance! 😊

You wouldn’t need to deposit £15000. If you deposited £12000 that would be grossed up to £15000 as a result of the provider claiming basic rate tax relief. 

You would then need to notify HMRC in order to benefit from the additional 20% relief on the £15000. 

Thank you for taking the time to respond, all understood. 

But then in my example, would the taxable earnings be deemed to be £45k and thus the £5k rental profit be taxed at 20% only?

I am keen to clarify this because whilst rental income is not counted as qualifying/pensionable earnings this method appears an easy work around to make it effectively be so (assuming of course that your rental profits are lower than your salary..)

Ferro

Your taxable earnings including property income remain unchanged - SIPP contributions do not change the amount of taxable income but may alter the rate at which it is chargeable. In your case the amount that you pay at 20% rate before you pay 40% would be extended by the grossed up contribution of £15000. 

So - employment earnings - £60000

12570 tax free, 47430 at 20%. 

Rental income - £5000 at 20%. 

(Without a contribution it would be - employment- 37700 at 20% plus 9730 at 40%.   Rental - 5000 at 40%)

Your last paragraph isn’t really correct as you could contribute up to your gross salary. 

Dazed_and_C0nfused

LoanCrapShooter said:

Ferro said:

LoanCrapShooter said:

Hi all, came across this thread whilst researching the following query...

If your salary is higher rate, and you wish to make sufficient pension contributions to avoid paying the higher tax on both your salary and rental profits, then in lieu of the Salary Sacrifice approch can you make pension contributions into a SIPP and sort it on your tax return? 

Example:

£60k salary
Deposit £15k into a SIPP
Pay basic rate only on £5k rental profits

Thanks in advance! 😊

You wouldn’t need to deposit £15000. If you deposited £12000 that would be grossed up to £15000 as a result of the provider claiming basic rate tax relief. 

You would then need to notify HMRC in order to benefit from the additional 20% relief on the £15000. 

Thank you for taking the time to respond, all understood. 

But then in my example, would the taxable earnings be deemed to be £45k and thus the £5k rental profit be taxed at 20% only?

I am keen to clarify this because whilst rental income is not counted as qualifying/pensionable earnings this method appears an easy work around to make it effectively be so (assuming of course that your rental profits are lower than your salary..)

You have got the wrong end of the stick somewhere.

Making relief at source (RAS) pension contributions never reduces your taxable income.

But they do increase your basic rate band, meaning more income can be taxed at 20% and less at 40%.

If you have total taxable income of £65k your tax liability will be calculated with reference to the whole £65k.

But you can make more of it taxable at 20% by making RAS pension contributions.

LoanCrapShooter

Thank you both for your help.

My objective is to use a SIPP contribution to sufficiently extend my basic rate band to encompass all rental income.

That would have been a better way of framing my question! Pleased to see it is doable.. 👍