UK Income tax bands and pension contributions

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RomeshRomesh Forumite
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Hi all,

My gross income puts me into the higher rate tax bracket, which I understand means that my personal savings allowance drops to £500 and I would pay a higher % of tax on dividends above £2k.

If I were to pay more into my pension so that my adjusted net income was less than the higher rate threshold, would that mean that my personal savings allowance and dividend tax become the same as a basic rate tax payer or are they remain at the higher rate levels.

To phrase it another way, can you change your tax bracket by making additional pension contributions?

Any help would be greatly appreciated!

(PS I came into some money this year and have maxed my ISA allowance already)

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  • Dazed_and_C0nfusedDazed_and_C0nfused Forumite
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    The simple answer is yes.  But possibly not quite how you think.

    Which method will you be using to get money into your pension?

    Net pay
    Relief at source
    Salary sacrifice 
  • RomeshRomesh Forumite
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    The simple answer is yes.  But possibly not quite how you think.

    Which method will you be using to get money into your pension?

    Net pay
    Relief at source
    Salary sacrifice 
    Hi, I was thinking about paying into my SIPP, but I'm also a member of USS, so I believe I have the option of paying more into that - I haven't worked out which would be better yet.
  • lisyloolisyloo Forumite
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    Romesh said:
    The simple answer is yes.  But possibly not quite how you think.

    Which method will you be using to get money into your pension?

    Net pay
    Relief at source
    Salary sacrifice 
    Hi, I was thinking about paying into my SIPP, but I'm also a member of USS, so I believe I have the option of paying more into that - I haven't worked out which would be better yet.
    If you're employer does salary sacrifice then you are better off doing that as you will also save employees National insurance.
    Unless of course there is something undesireable about the pension scheme (I'm not familiar with USS).

    If you put money into your SIPP then you either have to let HMRC know or do self assesment.
    The extra tax relief will then you into your pocket (not your pension).

    If you're affairs are simple then they may accept a letter/email.
    If they are more complex (and you mentioned dividends) then it might be done by self assement, so you'd get the higher rate tax relief in arrears.


  • YellowStarlingYellowStarling Forumite
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    The simple answer is yes.  But possibly not quite how you think.

    Which method will you be using to get money into your pension?

    Net pay
    Relief at source
    Salary sacrifice 
    Hi D&C, would you mind expanding on this if the answer had been/is sal sac?  I'm in the same boat as Romesh and contribute AVCs via sal sac to lower my income tax and get the benefit of 50% of my employer's saved NI contributions.  Sorry to hijack your thread Romesh, just thought it might be easier to get a similar Q answered and save a new thread.
  • edited 8 November 2022 at 12:26AM
    Dazed_and_C0nfusedDazed_and_C0nfused Forumite
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    edited 8 November 2022 at 12:26AM
    The simple answer is yes.  But possibly not quite how you think.

    Which method will you be using to get money into your pension?

    Net pay
    Relief at source
    Salary sacrifice 
    Hi D&C, would you mind expanding on this if the answer had been/is sal sac?  I'm in the same boat as Romesh and contribute AVCs via sal sac to lower my income tax and get the benefit of 50% of my employer's saved NI contributions.  Sorry to hijack your thread Romesh, just thought it might be easier to get a similar Q answered and save a new thread.

    You can't deduct salary sacrifice contributions as you aren't paying them, they are employer contributions.  That's also why no tax relief is added when the contribution goes into your pension fund.

    But the end result is generally the same as far adjusted net income is concerned.

    Say you have salary £60k and contribute £5k (gross) into a relief at source pension.  Your taxable income is still £60k but your adjusted net income is £55k.

    With a £60k salary where you sacrifice £5k you have taxable pay of £55k but cannot deduct any pension contributions from your adjusted net income as you don't pay them.
  • RomeshRomesh Forumite
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    Thanks for the replies everyone (and no problem Yellow, helpful to have related questions in the same thread)

    So, my contributions to USS are net pay I believe, so I'm getting a full 40% tax relief when I get paid.  Would I ignore those contributions when working out my adjusted net income?

    Let's say my salary is £55k, interest income: £1.5k and dividends: £1k, my contributions to USS: £4k and I pay £2k into a SIPP (20% tax relief is added by the provider and I claim the other 20% in my self-assessment).

    Would my adjusted net income be:
    a) £55.5k (55k + 1.5k + 1k - 2k), or
    b) £51.5k (55k + 1.5k + 1k - 4k - 2k)
    c) something else?

    Please correct me if I'm wrong, but I think the adjusted net income is what determines what personal savings allowance I get and although I wouldn't pay tax on my dividend income (as it's below the £2k allowance), it is added in adjusted net income?

    Thanks again for all the help!
  • Dazed_and_C0nfusedDazed_and_C0nfused Forumite
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    So, my contributions to USS are net pay I believe, so I'm getting a full 40% tax relief when I get paid. Would I ignore those contributions when working out my adjusted net income?
    Yes.  If you included them you would be double counting them.

    Personally I don't think any of your calculations are correct.

    I would say it's

    £51k + £1.5k + £1k = £53.5k taxable income

    Less gross RAS pension contributions £2.5k

    = Adjusted net income of £51k

    And there is no "other 20%" to claim.  The gross contribution increases your basic rate band by £2.5k but you won't have paid higher rate tax on £2.5k so your higher rate tax relief will be limited.
  • lisyloolisyloo Forumite
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    The simple answer is yes.  But possibly not quite how you think.

    Which method will you be using to get money into your pension?

    Net pay
    Relief at source
    Salary sacrifice 
    Hi D&C, would you mind expanding on this if the answer had been/is sal sac?  I'm in the same boat as Romesh and contribute AVCs via sal sac to lower my income tax and get the benefit of 50% of my employer's saved NI contributions.  Sorry to hijack your thread Romesh, just thought it might be easier to get a similar Q answered and save a new thread.

    You can't deduct salary sacrifice contributions as you aren't paying them, they are employer contributions.  That's also why no tax relief is added when the contribution goes into your pension fund.

    But the end result is generally the same as far adjusted net income is concerned.

    Say you have salary £60k and contribute £5k (gross) into a relief at source pension.  Your taxable income is still £60k but your adjusted net income is £55k.

    With a £60k salary where you sacrifice £5k you have taxable pay of £55k but cannot deduct any pension contributions from your adjusted net income as you don't pay them.
    Don't you pay NI on £60K in the first case and on £55K in the second case.
    At this level I believe it's 2%? but on lower incomes NI is 12%
  • edited 8 November 2022 at 1:37PM
    Dazed_and_C0nfusedDazed_and_C0nfused Forumite
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    edited 8 November 2022 at 1:37PM
    lisyloo said:
    The simple answer is yes.  But possibly not quite how you think.

    Which method will you be using to get money into your pension?

    Net pay
    Relief at source
    Salary sacrifice 
    Hi D&C, would you mind expanding on this if the answer had been/is sal sac?  I'm in the same boat as Romesh and contribute AVCs via sal sac to lower my income tax and get the benefit of 50% of my employer's saved NI contributions.  Sorry to hijack your thread Romesh, just thought it might be easier to get a similar Q answered and save a new thread.

    You can't deduct salary sacrifice contributions as you aren't paying them, they are employer contributions.  That's also why no tax relief is added when the contribution goes into your pension fund.

    But the end result is generally the same as far adjusted net income is concerned.

    Say you have salary £60k and contribute £5k (gross) into a relief at source pension.  Your taxable income is still £60k but your adjusted net income is £55k.

    With a £60k salary where you sacrifice £5k you have taxable pay of £55k but cannot deduct any pension contributions from your adjusted net income as you don't pay them.
    Don't you pay NI on £60K in the first case and on £55K in the second case.
    At this level I believe it's 2%? but on lower incomes NI is 12%
    Yes, the only time pension contributions will impact NI are when you don't pay them but sacrifice some salary in return for increased employer contributions.

    For example salary £60k but you sacrifice £5k.  Your taxable and NIC'ble pay is £55k and your employer pays an extra £5k into your pension fund. 

    No tax relief gets added to the £5k as it is an employer contribution.

    With salary sacrifice the typical tax and NI savings are,

    20% + 12% = 32%

    40% + 2% = 42%

  • RomeshRomesh Forumite
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    So, my contributions to USS are net pay I believe, so I'm getting a full 40% tax relief when I get paid. Would I ignore those contributions when working out my adjusted net income?
    Yes.  If you included them you would be double counting them.

    Personally I don't think any of your calculations are correct.

    I would say it's

    £51k + £1.5k + £1k = £53.5k taxable income

    Less gross RAS pension contributions £2.5k

    = Adjusted net income of £51k

    And there is no "other 20%" to claim.  The gross contribution increases your basic rate band by £2.5k but you won't have paid higher rate tax on £2.5k so your higher rate tax relief will be limited.
    Hi again Dazed and thank you for your patience explaining this.

    How did you get to the starting figure of £51k? Was that my gross salary of £55k minus the USS contributions of £4k?

    Also, how did you calculate the 'gross RAS pension contributions as £2.5k please?

    Are you aware of a guide or calculator somewhere that can help with this sort of thing?

    Thanks again for your help!
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