Bringing annual salary below 50k to avoid child benefit charge

challengesahead

I did a salary sacrifice pension to bring my salary under 50k to avoid child benefit charge for year 22-23. Just found out from my HR dept that we will possibly get a bonus in march which would push me above 50k again!

What is the best way to mitigate that at last minute saving tax.
I read few threads about SIPP, but is it right you dont actually save 40% as expected instead its 20%.

Thanks

Dazed_and_C0nfused

Couldn't you sacrifice the bonus?  You avoid paying tax and NI that way.  And have a lower taxable income for HICBC purposes.

A SIPP will achieve the same outcome tax (and HICBC) wise but it's more complicated than salary sacrifice.  And it doesn't reduce your taxable income.

Say you add £4,000 to a SIPP.  There are 3 key benefits,

1.  The pension company will add £1,000 in basic rate tax relief giving you a pension fund of £5,000

2.  Your basic rate tax band is increased by £5,000 meaning you can pay more 20% and less 40% tax

3.  Your adjusted net income (used to calculate HICBC) is reduced by £5,000.

challengesahead

The company doesn't allow sacrificing the bonus(although will need to check the contract again). 
Chances are it would be a bonus of 10k.

So if open a SIPP with any of the online providers and transfer 10k before 6 April 2023. 
1) They will add 2k to it, making the the total pension amount 12k.
2) I don't fully understand the increasing of basic rate band. If my salary is reduced to 50k what use is the increased band?

[Deleted User]

challengesahead said:

The company doesn't allow sacrificing the bonus(although will need to check the contract again). 
Chances are it would be a bonus of 10k.

So if open a SIPP with any of the online providers and transfer 10k before 6 April 2023. 
1) They will add 2k to it, making the the total pension amount 12k.
2) I don't full understand the increasing of basic rate band. If my salary is reduced to 50k what use is the increased band?

Let’s say your salary is now £50000. 

You get a bonus of £10000, taking the total to £60000. 

Your tax will be (on a 1257L code) £11432. (12570 tax free, 37700 at 20% with 9730 at 40%)

You make a SIPP contribution of £8000. This is made up to £10000 by the pension provider. 

Your tax is now £9486. (12570 tax free, 47430** at 20%, 0 at 40%)

So - your pension pot has increased by £10000 for an £8000 contribution and your tax has decreased by £1946. 

You also have restored full child benefit. A good deal!

** The amount that you pay at 20% before paying 40% has been extended by 9730. It would be 10000 if 10000 been liable to 40% at the outset.

Dazed_and_C0nfused

challengesahead said:

The company doesn't allow sacrificing the bonus(although will need to check the contract again). 
Chances are it would be a bonus of 10k.

So if open a SIPP with any of the online providers and transfer 10k before 6 April 2023. 
1) They will add 2k to it, making the the total pension amount 12k.
2) I don't fully understand the increasing of basic rate band. If my salary is reduced to 50k what use is the increased band?

If you have a (post sacrifice) taxable salary of £50,000 plus a bonus of £10,000 you would have taxable income of £60,000.  Where are getting £50,000 from?

And if you add £10,000 the pension company will add £2,500 not £2,000.  It's always 25% that gets added to RAS contributions.  The gross contribution would be £12,500.  20% of £12,500 is £2,500.

challengesahead

Thanks @[Deleted User] ! for a simplified explanation.

@Dazed_and_C0nfused may be I wasn't clear about the bonus. Its not fixed or set in contract. Am assuming it would be 10,000. 50,000 is my taxable income at the moment after salary sacrifice that I normally do.

Dazed_and_C0nfused

challengesahead said:

Thanks @[Deleted User] ! for a simplified explanation.

@Dazed_and_C0nfused may be I wasn't clear about the bonus. Its not fixed or set in contract. Am assuming it would be 10,000. 50,000 is my taxable income at the moment after salary sacrifice that I normally do.

But if you accept a bonus of £10,000 and pay £10,000 into a pension using the RAS method (typically a personal contribution to a SIPP or personal pension) then your taxable income will be £60,000.

They don't reduce your taxable income but see my original post regarding the benefits of a SIPP contribution

challengesahead

Dazed_and_C0nfused said:

challengesahead said:

Thanks @[Deleted User] ! for a simplified explanation.

@Dazed_and_C0nfused may be I wasn't clear about the bonus. Its not fixed or set in contract. Am assuming it would be 10,000. 50,000 is my taxable income at the moment after salary sacrifice that I normally do.

But if you accept a bonus of £10,000 and pay £10,000 into a pension using the RAS method (typically a personal contribution to a SIPP or personal pension) then your taxable income will be £60,000.

They don't reduce your taxable income but see my original post regarding the benefits of a SIPP contribution

okay, I understand now. Although the taxable income is still 60k (after 10k in to SIPP). For child benifit charge purposes the adjusted income which would be 50k.

Is there any other disadvantage of having taxable income at 60k this way?

Thanks 

TheAble

This whole "taxable" income thing is confusing. If you earn 60k but put 8k in your SIPP them you're only going to be effectively taxed on 50k.

I don't really see the point of the distinction between "taxable" and "adjusted". Is there a subtle difference?

Dazed_and_C0nfused

TheAble said:

This whole "taxable" income thing is confusing. If you earn 60k but put 8k in your SIPP them you're only going to be effectively taxed on 50k.

I don't really see the point of the distinction between "taxable" and "adjusted". Is there a subtle difference?

You have misunderstood somewhere along the line.

If you earn £60k (in taxable wages) and put £8k (net) into your SIPP you will still be taxed on £60k.

But your basic rate band will be increased by £10k, meaning more income is taxed at 20% and less at 40%.

And if you have no other taxable income whatsoever your adjusted net income would be £50k.

challengesahead

Thanks for all the replies.

I managed to open a SIPP account and will be transferring funds to it.  I do have savings income but less than 1k.

Total taxable income including bonus for year 22-23 - £59,000
If I am calculating right?, I need to put £7200 (20% of 9000) into my SIPP before 6th April 2023. and then claim(another 20%) when filing SA.

Is there anything else I need to take care of to make sure I stay below 50k(or in other words increase the basic rate  band to £59000)?