AVCs to change tax band?

kidwell25

Following a promotion this year I've crept into the 40% tax band. Alongside this, I will receive more than £500 in interest on my savings, so I understand any interest I earn above £500 will be taxed at 40% (though I don't know when HMRC do their thing, as there's been no sign of my tax code changing as yet)

I'm in the USS pension scheme which allows for AVCs to be made via salary sacrifice. I'm currently paying 40% tax on around £2300 of my salary. So my first question is, if I use the salary sacrifice mechanism to pay AVCs of more than £2300 per year, thereby bringing my salary back under the 40% threshold, would I then revert to a situation of a personal savings allowance of £1000 and paying only 20% tax on interest above that value? 

Second question: Would I receive tax relief at 40% on the whole AVC regardless of the size of it? Or only up to a value £2300, with anything above this attracting relief at 20%?

Thanks!

Dazed_and_C0nfused

kidwell25 said:

Following a promotion this year I've crept into the 40% tax band. Alongside this, I will receive more than £500 in interest on my savings, so I understand any interest I earn above £500 will be taxed at 40% (though I don't know when HMRC do their thing, as there's been no sign of my tax code changing as yet)

I'm in the USS pension scheme which allows for AVCs to be made via salary sacrifice. I'm currently paying 40% tax on around £2300 of my salary. So my first question is, if I use the salary sacrifice mechanism to pay AVCs of more than £2300 per year, thereby bringing my salary back under the 40% threshold, would I then revert to a situation of a personal savings allowance of £1000 and paying only 20% tax on interest above that value? 

Second question: Would I receive tax relief at 40% on the whole AVC regardless of the size of it? Or only up to a value £2300, with anything above this attracting relief at 20%?

Thanks!

Your tax code would be changed for interest the first time HMRC review it when you have more than £500 interest in the preceding tax year (or sometimes the one before that) and you are expected to need to pay some additional tax on the interest.

So quite likely it will be when they issue your initial tax code for 2023:24 (using your 2021:22 interest as an estimate at that point).

Reducing your taxable salary to less than the 40% threshold is not what matters.

The amount of savings nil rate band (aka PSA) is based on whether you are a higher rate payer before application of the savings nil rate band.

So if your total taxable income (including any taxable interest) makes you a higher rate payer using that calculation you will get £500 taxed at 0%.

Salary sacrifice contributions are actually employer contributions so don't get any pension tax relief.  As far as your personal income tax saving you just save the tax you would have paid had they been taxable.  So if you would be paying higher rate tax on £2,000 of your taxable salary and sacrifice £3,000 you will avoid paying 40% tax on £2,000 and avoid paying 20% tax on £1,000.

But remember the £2,000 only avoids 2% NI saving whereas the £1,000 avoids 12% NI, so a total of 42% vs 32%.

And as well as the impact on the savings nil rate band reducing your taxable income could make you eligible for Marriage Allowance (if relevant).

kidwell25

Dazed_and_C0nfused said:

kidwell25 said:

Following a promotion this year I've crept into the 40% tax band. Alongside this, I will receive more than £500 in interest on my savings, so I understand any interest I earn above £500 will be taxed at 40% (though I don't know when HMRC do their thing, as there's been no sign of my tax code changing as yet)

I'm in the USS pension scheme which allows for AVCs to be made via salary sacrifice. I'm currently paying 40% tax on around £2300 of my salary. So my first question is, if I use the salary sacrifice mechanism to pay AVCs of more than £2300 per year, thereby bringing my salary back under the 40% threshold, would I then revert to a situation of a personal savings allowance of £1000 and paying only 20% tax on interest above that value? 

Second question: Would I receive tax relief at 40% on the whole AVC regardless of the size of it? Or only up to a value £2300, with anything above this attracting relief at 20%?

Thanks!

Your tax code would be changed for interest the first time HMRC review it when you have more than £500 interest in the preceding tax year (or sometimes the one before that) and you are expected to need to pay some additional tax on the interest.

So quite likely it will be when they issue your initial tax code for 2023:24 (using your 2021:22 interest as an estimate at that point).

Reducing your taxable salary to less than the 40% threshold is not what matters.

The amount of savings nil rate band (aka PSA) is based on whether you are a higher rate payer before application of the savings nil rate band.

So if your total taxable income (including any taxable interest) makes you a higher rate payer using that calculation you will get £500 taxed at 0%.

Salary sacrifice contributions are actually employer contributions so don't get any pension tax relief.  As far as your personal income tax saving you just save the tax you would have paid had they been taxable.  So if you would be paying higher rate tax on £2,000 of your taxable salary and sacrifice £3,000 you will avoid paying 40% tax on £2,000 and avoid paying 20% tax on £1,000.

But remember the £2,000 only avoids 2% NI saving whereas the £1,000 avoids 12% NI, so a total of 42% vs 32%.

And as well as the impact on the savings nil rate band reducing your taxable income could make you eligible for Marriage Allowance (if relevant).

Thanks for this detailed response. I think I had conflated a few issues and tied my brain up in knots ! And I'd completely failed to factor taxable interest into the equation. So let's say I generate savings interest of £4000 per annum. So to get my PSA up to £1000 and only be taxed on £3000 of interest (and that tax to only be at 20%) I'd need to use salary sacrifice to reduce my salary by £5800 (i.e. £2300 + £3500). Is that correct? [NB I know it'll probably be too far into this year to implement the change, but I'm thinking for the future]

The other thing I'd not even mentioned is that I can make AVCs with or without salary sacrifice. I'd assumed the SS method was more advantageous on the basis of it having the potential to reduce the tax payable on my savings (and also the NI implications). But if I paid the AVCs without salary sacrifice I think I'd get 40% relief on the whole AVC (as it is paid at the highest rate of tax) is that correct? So if instead I paid £5800 as an AVC, that would put £9666 into my pension pot. Think I'll need to stick this all into a spreadsheet to work out which would be the better option given that I'm generating fairly healthy savings interest (on current rates anyhow!) - or is it a rule of thumb that SS will always be more advantageous?

Marcon

kidwell25 said:

Dazed_and_C0nfused said:

kidwell25 said:

Following a promotion this year I've crept into the 40% tax band. Alongside this, I will receive more than £500 in interest on my savings, so I understand any interest I earn above £500 will be taxed at 40% (though I don't know when HMRC do their thing, as there's been no sign of my tax code changing as yet)

I'm in the USS pension scheme which allows for AVCs to be made via salary sacrifice. I'm currently paying 40% tax on around £2300 of my salary. So my first question is, if I use the salary sacrifice mechanism to pay AVCs of more than £2300 per year, thereby bringing my salary back under the 40% threshold, would I then revert to a situation of a personal savings allowance of £1000 and paying only 20% tax on interest above that value? 

Second question: Would I receive tax relief at 40% on the whole AVC regardless of the size of it? Or only up to a value £2300, with anything above this attracting relief at 20%?

Thanks!

Your tax code would be changed for interest the first time HMRC review it when you have more than £500 interest in the preceding tax year (or sometimes the one before that) and you are expected to need to pay some additional tax on the interest.

So quite likely it will be when they issue your initial tax code for 2023:24 (using your 2021:22 interest as an estimate at that point).

Reducing your taxable salary to less than the 40% threshold is not what matters.

The amount of savings nil rate band (aka PSA) is based on whether you are a higher rate payer before application of the savings nil rate band.

So if your total taxable income (including any taxable interest) makes you a higher rate payer using that calculation you will get £500 taxed at 0%.

Salary sacrifice contributions are actually employer contributions so don't get any pension tax relief.  As far as your personal income tax saving you just save the tax you would have paid had they been taxable.  So if you would be paying higher rate tax on £2,000 of your taxable salary and sacrifice £3,000 you will avoid paying 40% tax on £2,000 and avoid paying 20% tax on £1,000.

But remember the £2,000 only avoids 2% NI saving whereas the £1,000 avoids 12% NI, so a total of 42% vs 32%.

And as well as the impact on the savings nil rate band reducing your taxable income could make you eligible for Marriage Allowance (if relevant).

Thanks for this detailed response. I think I had conflated a few issues and tied my brain up in knots ! And I'd completely failed to factor taxable interest into the equation. So let's say I generate savings interest of £4000 per annum. So to get my PSA up to £1000 and only be taxed on £3000 of interest (and that tax to only be at 20%) I'd need to use salary sacrifice to reduce my salary by £5800 (i.e. £2300 + £3500). Is that correct? [NB I know it'll probably be too far into this year to implement the change, but I'm thinking for the future]

The other thing I'd not even mentioned is that I can make AVCs with or without salary sacrifice. I'd assumed the SS method was more advantageous on the basis of it having the potential to reduce the tax payable on my savings (and also the NI implications). But if I paid the AVCs without salary sacrifice I think I'd get 40% relief on the whole AVC (as it is paid at the highest rate of tax) is that correct? So if instead I paid £5800 as an AVC, that would put £9666 into my pension pot. Think I'll need to stick this all into a spreadsheet to work out which would be the better option given that I'm generating fairly healthy savings interest (on current rates anyhow!) - or is it a rule of thumb that SS will always be more advantageous?

You'd get the same amount of tax relief whether you pay AVCs by SS, or as a personal contribution. The difference with SS relates purely to a potential saving in NI. If you pay £5,800 as an AVC, the amount put into your pension pot would be £7250 (because only basic rate relief is claimed and added to the pot by a pension provider) and you then get a further 20%  rebated to you personally - and would need to claim this either via your self assessment tax return or directly from HMRC. If you pay your AVC by SS and the amount in question is £9,666 then £9,666 is added to your AVC pot - and of course you don't pay any tax on the £9,666 because your salary has been reduced by that amount.

Remember you can only get tax relief at 40% to the extent you've actually paid 40% tax in the first place - e.g. if you are only just into higher rate tax (say £100) and make a personal contribution of £200 to your AVC, only £100 of that will qualify for higher rate tax relief.

MX5huggy

Use the SS AVC to the maximum you can afford. For every £100 you sacrifice your only giving up in your pocket of £58 on income that would be taxed at 40% and £68 on 20% taxed income. If you’re pay student loan you also “save” on those payments (it’s not a true saving because you are still accruing interest but I’m expecting mine to be written off before I pay it off so I don’t want to pay more than I have to). If you have children then additionally getting your salary below £50k will enable you to avoid the Child Benefit charge the claws it back on income between £50 and £60k. 

You can vary your SS I See no reason you can’t SS enough this tax year. 

I would be looking to SS more than I can afford by living off savings to move money from savings into pension. 

There’s 2 limits you can’t SS below National Minimum Wage so your gross salary after SS needs to stay above £9.50 an hour or about £19k. 

And the pension Annual Allowance you can’t put more than £40k in a pension each year but you have carry forward for 3 previous years. Working this out is a bit complicated because you are in a DB pension you need your Pension Input Amount. Under £10k of SS is not going to become a problem just if you want to maximise it to the full need’s consideration. 

I AVC SS about 1/3 of my salary. But £20k off higher rate tax before SS.

kidwell25

Thanks for all this info. Some more context on my side: 

I'm 44
I don't have a student loan
I'm not married and don't have children
Mortgage is already paid off and I don't intend to move
I have around £160k in various cash savings/ISAs and £270k in a stocks and shares ISA
If I stopped working today, when I came to state pension age the DB part of the scheme would give me a lump sum of £39k and an annuity of £13k and the DC part a pot of £7500. Any AVCs I make have to go into the DC pot.

In terms of tax efficiency it seems clear that putting as much as possible into AVCs via salary sacrifice is the way to go. The only thing causing me to hesitate is the fact that I ideally want to retire as soon after age 50 as possible. I won't reach normal pension age till I'm 68 and won't be able to touch my pension till I'm 57 (and for every year before 68 the annuity goes down quite significantly, so I'd want to hold off as long as possible).

So there's going to be a period of time between stopping working and drawing my pension during which I'd be living off my savings (which is why I was looking at how I could minimize my tax liability on these). So the more that goes into my pension in the coming 5 years the less I'll be adding to my savings. However it looks like I can access the DC pot before taking my DB lump sum and annuity, so I guess if I keep maxing out my ISA allowance each year and put the remaining ~£6k that would otherwise have gone into normal taxable savings into AVCs I could then access that pot from 57.