Returning to basic tax rate via pension contributions, using specific numbers

vacheron

Apologies, I’ll blame my lack of reading the date to brain flatulence due to packing up my desk to head home for the day as I was typing it! 😂

I’m salary sacrificing all I can at the moment, just in case they decide to close this very beneficial system down in the future at which point I would be full of regret that I didn’t take advantage of it while I could!  🤪

Zuzi

@r6mile Good question, I'll try to explain and please tell me if I have got any of this wrong.

Child benefits / marriage allowance do not play a role. I do understand that if I am earning e.g. 70K, the tax is tiered and I pay 20% on some of it and 40 % on another bit of it, that is fair and I do not have a big problem with that.

My focus is the tax on savings interest. Let's say I earn 4K in savings interest next year. As a higher rate payer, not only is my allowance just 500, i.e. tax is payable on 3500, but also that 3500 is taxed at 40%.
If I were a basic rate payer, tax would be payable on 3000 and it would only be taxed at 20%.

Like I said, happy to stand corrected if this is not correct. 

PS Oh yes a small pension pot is also a factor, mine is tiny for my age but that's because I have had an international career (which may well continue abroad at some point again), for now I am happy to contribute to it with a high proportion of my income.

vacheron

Zuzi said:

My focus is the tax on savings interest. Let's say I earn 4K in savings interest next year. As a higher rate payer, not only is my allowance just 500, i.e. tax is payable on 3500, but also that 3500 is taxed at 40%.
If I were a basic rate payer, tax would be payable on 3000 and it would only be taxed at 20%.

Like I said, happy to stand corrected if this is not correct. 

Only if your "adjusted net income" remains below the 40% threshold, and this includes many income streams in addition to salary and also includes savings interest! (I fell foul of this a few years ago)!

In your case you would need to sacrifice down to £3K under the 40% limit for all of your 4K of taxable interest to be taxed at 20% or below (providing you have no other additions to consider).

This handy guide helped me!
https://www.gov.uk/guidance/adjusted-net-income

Zuzi

@vacheron Yes, that is my understanding, thanks for confirming.

Before I went to listentotaxman I just thought "let's get the salary down to 40K, that should still work out with savings interest and the few K bonus that I'll probably get spread out over the year, then I will be safely below 50K total income". Tbh some of the more detailed calculations I still don't understand as well as I would like to, so I am inclined to simply divert 30K or just below that to the pension via SS, and then I should be a basic rate payer again and live just fine on what used to be my income two years ago... 

I'd rather put away 5K "too much" than 100 pounds too little and have the plan fail because I end up still over the threshold.

vacheron

Yes, and actually going a bit under the higher rate threshold with salary sacrifice is not a bad thing because whereas you will save "just" 20% or 40% with a regular scheme, with salary sacrifice you are also saving the NI.

As the NI reduces from 12% to 2% at around the same point that your tax jumps to 40%, under salary sacrifice you are 42% (40% Tax = 2% NI) better off with any 40% taxable contributions, but you are still 32% (20% Tax = 12% NI) better off contributing 20% taxable salary!   

Also even more if your employer gives you some or all of their NI saving as that could be up to a further 13.8% 

Zuzi

vacheron said:

......

Also even more if your employer gives you some or all of their NI saving as that could be up to a further 13.8% 

Unfortunately they don't do that, I checked  but still a great deal.

TheAble

Are you able to adjust your pension contributions on a monthly basis? For the reason vacheron mentions above re. ni rates, it's much more efficient to make larger SS for a shorter time (thus saving more NI at 12% rather than 2%), than smaller SS for a longer time. This is because NI is calculated monthly rather than annually. Worth considering if the option is available.

vacheron

Great point, similarly,  if you don’t have SS it would be better to be paid one huge monthly payment and then almost nothing for the next 2 months as you’ll only pay 2% NI on most of your lump sum salary which is calculated monthly, whereas the tax gets averaged out over the year. 

It’s a funny system we have here! 😁

Zuzi

Update to my endeavour - I think I may have missed the boat 

I had increased my salary sacrifice contributions to 33% in May, but as per my latest payslip for Month 7 of the tax year my cummulative taxable pay even so is already at >32K. With 5 months still left, I am not sure I can squeeze my total income for this year under 50K  :'(

Since I have already earned the equivalent of minimum annual wage, can I increase my pension contributions to something silly high like 75-80%, or is that calculated monthly and my monthly income needs to be > minimum wage?

(I have savings and it is not so important how much money is coming in, as long as I get 500-1000 pounds fresh money every month I will be fine)

I need my total annual salary to be <45K really, since I will be getting a lot in savings interest and a bit of side income from Prolific too (Lord knows why I signed up for that!  )

ETA My employer allows monthly changes to the contributions, luckily

vacheron

Zuzi said:

Since I have already earned the equivalent of minimum annual wage, can I increase my pension contributions to something silly high like 75-80%, or is that calculated monthly and my monthly income needs to be > minimum wage?

From my recollection, minimum wage is determined from each payslip, so so you need to have at least your number of contracted hours x minimum wage remaining on each payslip you recieve (whatever the frequency).