Higher rate tax/Pension contribution

Mikey481

Afternoon folks looking for some advice regarding whether it’s beneficial to increase my contributions into a DC employers scheme to reduce/ eliminate paying the 40% rate I’ve tried to get my head around it but failed !!
I am drawing a DB pension which is approx £24000 a year but have come out of retirement and currently paying into a salary sacrifice scheme where my employer pays 10% and I pay 5% on a salary of £38500. I do have the option of paying as much as I feel comfortable with, is it more efficient to reduce overall income by increasing significantly my contribution to eliminate any 40% tax due or claim the extra tax relief from HMRC. Currently 61 probably looking to work for another 2 years and will have maximum state pension with another years NI contributions.
Thanks all

ewaste

Mikey481 said:

I do have the option of paying as much as I feel comfortable with, is it more efficient to reduce overall income by increasing significantly my contribution to eliminate any 40% tax due or claim the extra tax relief from HMRC.  

I don't understand the portion quoted above🤔

The only reason you'd be able to reclaim extra tax relief is by contributing to a pension. You are a member of a workplace pension that uses salary sacrifice. You'd be best to up your contribution to that scheme to also save on NI. There is then nothing to reclaim as the contribution is made before income tax or NI are applicable as it's technically an employer contribution in lieu of salary.

If you contributed to a SIPP or other Relief at Source scheme then you'd need to contact HMRC to reclaim the Higher Rate Relief. However given that you have the option of salary sacrifice it'd be a rather odd and inefficient thing to do.

Grumpy_chap

Once you start drawing a pension, there are limits (£4k) on what can be contributed.  That restriction may apply only to drawing a DC pension and may be different rules on drawing a DB pension.  Hopefully someone will be able to confirm shortly.

If the limit on contribution does not apply to taking DB pension, then the limit will be annual allowance £40k (or your annual earnings £38.5k as this is lower).
Associated with the £38.5k salary, you have £3,850 employer contributions plus £1,925 SS contributions (which also become employer contributions).
To avoid higher rate tax, you would want £50k income, so £24k DB pension plus £26k salary.  That would require you to SS £12.5k per year making total £16,350 pension contributions (your £12.5k as employer contributions through SS plus the employer £3,850).

Obviously, double check the rules about whether the £4k contribution cap applies.

How close is your total pension provision to lifetime allowance?

Finally, there are some commentators who say the basic rate tax band will be increased to £80k in the budget on Friday.  I have no idea whether that will happen, but might as well wait until then to make your final decision.

Albermarle

Once you start drawing a pension, there are limits (£4k) on what can be contributed.  That restriction may apply only to drawing a DC pension and may be different rules on drawing a DB pension.  Hopefully someone will be able to confirm shortly.

Drawing a DB pension does not invoke the MPAA annual limit of £4Kpa. So the OP can go ahead and increase their contributions along the lines you suggest.

I suspect the ' increase the 40% tax threshold to £80K' was one of those off the cuff policies, that were rife during the leadership campaign. However would make sense to wait and see, as the mini budget is only a few days away.

Grumpy_chap

Albermarle said:

Once you start drawing a pension, there are limits (£4k) on what can be contributed.  That restriction may apply only to drawing a DC pension and may be different rules on drawing a DB pension.  Hopefully someone will be able to confirm shortly.

Drawing a DB pension does not invoke the MPAA annual limit of £4Kpa. So the OP can go ahead and increase their contributions along the lines you suggest.

I suspect the ' increase the 40% tax threshold to £80K' was one of those off the cuff policies, that were rife during the leadership campaign. However would make sense to wait and see, as the mini budget is only a few days away.

Thanks for confirming on the £4k limit.
It seems inconsistent of the Government to apply different rules between drawing a DB and DC pension, but hey-ho, when did Government rules ever make sense?

The increase (or not) in the basic rate tax threshold may be an irrelevant consideration in any case.  Assuming the OP will not be a higher rate tax payer when all pensions are being drawn, paying in now through SS saves income tax and NI contributions and 25% can then be taken tax-free lump sum and the remainder will only be subject to basic rate tax.  If the OP does not need the earned income for the next 2 or 3 years of working, they could SS to NMW and then draw the 25% tax free plus balance at basic rate.

squirrelpie

Grumpy_chap said:

It seems inconsistent of the Government to apply different rules between drawing a DB and DC pension

Hmm, I wonder what type of pension MPs get, and whether self-interest might be a factor? (Me too for full disclosure, not that the rule affects me)

Mikey481

Thanks everyone for your advice very useful👍