Pension Contributions - tax relief

Funky_Haggis

Happy Tuesday,

Looking for some guidance please on pension contributions (DC).

I currently contribute 4% of my salary before tax (Net pay arrangement).

My employer contributes 10% (this is the max they will do).

I was playing around with the online pension account and looking at options of increasing my monthly contribution with the aim of increasing my pension pot.

For example, if I increase my monthly contribution to 10%, it says an extra £269 will go into my pension pot, but less than this figure will be deducted from my take home pay. I assume this is the tax relief?

I want to know how much this is going to cost me / how much my take home pay will reduce by, as it doesn't appear this will be the full 10% / £269.

Am I right in thinking my take home pay will actually reduce by £161.40 (£269 * 60% = £161.40) as I am a higher rate 40% tax payer.

there is every chance I am completely misunderstanding this!

many thanks

Brenster

There are 2 different numbers here, how much it will cost you, and how much it will add to your pension.

Does the £269 include your employers contribution ? 

If you contribute 4% now, what is your deduction for your pension before tax ? once this is known, it shouldnt be too dificult to work out the additional 6% amount, and this will enable you to get a rough idea of how much less you will have after tax per month.

Generally speaking it is a no brainer to contribute enough to bring you back within the 'normal' tax bracket (i.e around the £50k region)

Funky_Haggis

Brenster said:

There are 2 different numbers here, how much it will cost you, and how much it will add to your pension.

Does the £269 include your employers contribution ? 

If you contribute 4% now, what is your deduction for your pension before tax ? once this is known, it shouldnt be too dificult to work out the additional 6% amount, and this will enable you to get a rough idea of how much less you will have after tax per month.

Generally speaking it is a no brainer to contribute enough to bring you back within the 'normal' tax bracket (i.e around the £50k region)

thanks!

My company won't match any contributions above the 10% they already do.

The £269 is how much extra goes into my Pension if I increase my share to 10%, but not what it actually costs me.

My 4% before tax equates to £179 and company 10% comes to £462

Not sure why it's all so complicated (or I may be slightly stupid)

Brenster

Ok, based on the numbers you give your salary is therefore aprox £54k ? 

If so, if you up your contribution to 10%, that will be aprox £450 per month before tax (£271 more than now), or £5,400 per year before tax (£3250 more than now).

I dont have the exact numbers, but i would guess the impact on your take home pay would be aprox £175 / month.

Sounds like a sensible financial decision based on my assumptions (of course if you can afford it)

Funky_Haggis

Brenster said:

Ok, based on the numbers you give your salary is therefore aprox £54k ? 

If so, if you up your contribution to 10%, that will be aprox £450 per month before tax (£271 more than now), or £5,400 per year before tax (£3250 more than now).

I dont have the exact numbers, but i would guess the impact on your take home pay would be aprox £175 / month.

Sounds like a sensible financial decision based on my assumptions (of course if you can afford it)

Your assumptions are correct!

I can afford it with some minor adjustments. It seems like the obvious thing to do and I will do some more research just to be safe.

thanks!

Brenster

I think the extra contribution, hits the sweet spot in getting a 40% tax benefit.  It would be worth considering this with any future rises you may get, but the higher tax threshold bracket may increase aswell.
Good Luck.

Albermarle

Funky_Haggis said:

Brenster said:

Ok, based on the numbers you give your salary is therefore aprox £54k ? 

If so, if you up your contribution to 10%, that will be aprox £450 per month before tax (£271 more than now), or £5,400 per year before tax (£3250 more than now).

I dont have the exact numbers, but i would guess the impact on your take home pay would be aprox £175 / month.

Sounds like a sensible financial decision based on my assumptions (of course if you can afford it)

Your assumptions are correct!

I can afford it with some minor adjustments. It seems like the obvious thing to do and I will do some more research just to be safe.

thanks!

Higher rate pension tax relief is the gift that just keeps on giving. So you should make best use of it you can.