Maximising pension contributions for tax relief

LV_426

Albermarle said:

The pension scheme is 'relief at source', so the provider (Nest) automatically adds 20%. I would claim the additional 20% through SA, and I believe you can take this paid into your bank account, rather than an adjustment of tax code for the next year, correct?

The first year you do this, you will get a tax rebate paid to your bank account. Then HMRC will assume that you will make the same pension contribution in the next tax year and adjust your tax code accordingly. So you will get more take home pay each month but no further rebate will be due.

If the next tax year you make a smaller contribution ( not recommended as you want to take maximum advantage of the 40% relief) then you need to inform HMRC or you  could end up owing them. Or if you have an on line personal tax account you can request a change in tax code. 

Thanks that is very useful to know. Can't 100% guarantee that I'll make the same contribution next year, as this money is a gift from my parents. So I'll probably request that change in tax code.

LV_426

If I max out my pension contributions in the higher rate tax band, does this have an effect on my child benefit charges? Currently we receive it, but because my salary is over £50k, I end up having to pay it back. 
Would increasing my pension contributions mean I don't have to? Bear in mind this is not salary sacrifice, it's relief at source.

On-the-coast

definitely!
at your level of salary your marginal tax rate between 50 & 60k is huge (particularly if you have several children). 

LV_426

On-the-coast said:

definitely!
at your level of salary your marginal tax rate between 50 & 60k is huge (particularly if you have several children). 

On-the-coast said:

definitely!
at your level of salary your marginal tax rate between 50 & 60k is huge (particularly if you have several children). 

Damn! I wish I'd been aware of this the last couple of years. I'd have paid a lot more into my pension. The benefits of pension contributions at high rate tax just get better.

Mutton_Geoff

Does your employer make any contribution? Is there any way to sal sac (salary sacrifice) into your pension scheme since you'll save another 2% NI. For those sitting close inside the 40% tax band as you are, it's worth looking at adjusting your pension contributions to get back out of the tax band. In your case if you are in England with standard tax coding, assuming the £62k is taxable income, you can put £11,730 a year into your pension at a cost to you of £7,038 (£586 a month reduction in net pay).

If you pop your £10k gift into an instant access account then draw the monthly £586 salary "loss" from it, you can keep going for 18 months before it ran out. If you receive any payrises, just up your pension contributions to sit right under the higher rate tax threshold and before long your pension will be fattening up with money you never missed.

Rather than make a one off contribution, it may be better to drip it in by the method described to set you up for future long term pension investment then it really will be a gift that keeps on giving.

LV_426

Mutton_Geoff said:

Does your employer make any contribution? Is there any way to sal sac (salary sacrifice) into your pension scheme since you'll save another 2% NI. For those sitting close inside the 40% tax band as you are, it's worth looking at adjusting your pension contributions to get back out of the tax band. In your case if you are in England with standard tax coding, assuming the £62k is taxable income, you can put £11,730 a year into your pension at a cost to you of £7,038 (£586 a month reduction in net pay).

If you pop your £10k gift into an instant access account then draw the monthly £586 salary "loss" from it, you can keep going for 18 months before it ran out. If you receive any payrises, just up your pension contributions to sit right under the higher rate tax threshold and before long your pension will be fattening up with money you never missed.

Rather than make a one off contribution, it may be better to drip it in by the method described to set you up for future long term pension investment then it really will be a gift that keeps on giving.

Unfortunately it's not sal sacrifice, so I don't get the NI reduction.
Yes the employer does make an 8% contribution.

On-the-coast

Re Child Benefit clawback...

Damn! I wish I'd been aware of this the last couple of years. I'd have paid a lot more into my pension. The benefits of pension contributions at high rate tax just get better.

with 3 children (for example) you'd be handing back about £2500 between 50k and 60k of earnings... so a marginal tax rate of 65% (plus 2% NI).  so if you can bring your P60 taxable salary to 50k you'd be keeping all that addtional £2500 too. (less if less children clearly).  Don't forget that if your other half is earning above £50k taxable also, they will still be subject to the handback.

btw, it's retrospective, but only within the current tax year.

Mutton_Geoff

On-the-coast said:

with 3 children (for example) 

A friend of mine got a vasectomy because he didn't want kids. But when he went home after the op, they were still there.    

LV_426

Mutton_Geoff said:

On-the-coast said:

with 3 children (for example) 

A friend of mine got a vasectomy because he didn't want kids. But when we went home after the op, they were still there.    

There are times when I wish I'd done that.