Tax Band Classification

Jamster128

Hi all,

I've been trying to figure out if I increase my salary sacrifice into a company pension so that I'm below the 40% threshold does that then make me a Basic rate taxpayer? I noticed on a different thread that being a higher rate taxpayer I have less personal savings allowance and also a higher dividend tax rate.

Some figures:
Annual Salary: £65,000
Current Pension (Salary Sacrifice amount) = 11%
Tax Code: 1257L

I'm thinking of increasing the Salary Sacrifice amount to 23%
I plugged these numbers into a salary calculator and if I'm interpreting the results correctly; I don't pay any tax at 40%.
In addition, I think the net adjusted income will be £50,050, which means I can keep all of the child benefit and not have to pay any HICBC.

I wasn't sure if it also meant I can save more money before tax as I'm only paying tax at Basic rate or will HMRC see me as a higher rate taxpayer still but chose to salary sacrifice a proportion of my earnings.

Thank you!

Albermarle

 I noticed on a different thread that being a higher rate taxpayer I have less personal savings allowance
You have read that wrong, probably it was referring to 45% taxpayers.Tax Code: 1257L is normal

I'm thinking of increasing the Salary Sacrifice amount to 23%
I plugged these numbers into a salary calculator and if I'm interpreting the results correctly; I don't pay any tax at 40%.
In addition, I think the net adjusted income will be £50,050, which means I can keep all of the child benefit and not have to pay any HICBC.
That is correct,

I wasn't sure if it also meant I can save more money before tax as I'm only paying tax at Basic rate or will HMRC see me as a higher rate taxpayer still but chose to salary sacrifice a proportion of my earnings.
Once you sal sac below the 40% threshold , then you will only gain tax relief at 20%

Dazed_and_C0nfused

I've been trying to figure out if I increase my salary sacrifice into a company pension so that I'm below the 40% threshold does that then make me a Basic rate taxpayer? I noticed on a different thread that being a higher rate taxpayer I have less personal savings allowance and also a higher dividend tax rate.

Not necessarily no.  You need to consider all of your taxable income, not just your (taxable) salary.

A higher rate payer will have a savings nil rate band (aka PSA) of up to £500 taxable interest which is taxed at 0%.

You are 100% wrong about the dividend tax rates, there are no different rates for higher rate payers.  The rates are exactly the same for everyone.  They are taxed last though so it easy for dividends > £2k to end up being taxed at one of the higher rates.

Dividend nil rate = 0% (first £2,000)
Dividend basic rate = 8.75%
Dividend higher rate = 33.75%
Dividend additional rate = 39.35%

Three of the four rates will reduce slightly from April 2023. Unless yet more changes are announced by the Chancellor.

Re the comment below, that is only cored t in respect of your salary.  Whether you are deemed a higher rate taxpayer is determined by your total taxable income (and often any expenses, Gift Aid or RAS pension contributions).

I plugged these numbers into a salary calculator and if I'm interpreting the results correctly; I don't pay any tax at 40%

Jamster128

ah thanks, that’s great!

From the first point, I think as basic taxpayer, the personal savings allowance lets people earn up to £1,000 in interest without paying tax on it. A higher rate tax payer is only £500 so i guess this equates to lesser savings at same interest before you get taxed.

The last point about tax relief at 20%. As I’m salary sacrificing, there hasn’t been any extra relief I’ve been claiming for.

I guess I just need to keep an eye on anything that may push me back into the 40% band.

Dazed_and_C0nfused

In addition, I think the net adjusted income will be £50,050, which means I can keep all of the child benefit and not have to pay any HICBC.

Again you are over simplifying this, it is your total taxable income which is an integral part of your adjusted net income.

So say you have taxable salary (P60 pay figure) of £50,050.  And interest of £500.  And dividends of £500.

Your adjusted net income would be £51,050 (assuming nothing else needs to be factored in) so the HICBC charge would be 10% of the Child Benefit.

Jamster128

okay, that’s really helpful and not something I’ve considered in the calculations.
I’ll sacrifice a little more to take into any account of income from savings and dividends.

Thanks!

Dazed_and_C0nfused

You might find this helpful.

Just remember you cannot deduct salary sacrifice pension contributions as these are employer contributions 

https://www.gov.uk/guidance/adjusted-net-income

Albermarle

I noticed on a different thread that being a higher rate taxpayer I have less personal savings allowance
You have read that wrong, probably it was referring to 45% taxpayers.Tax Code: 1257L is normal

Just to say, I read your questions wrongly, so ignore my answer.