Additional voluntary pension contributions for a 33.75% taxpayer.

Steve182

By no coincidence my PAYE earnings after company car BIK and salary sacrifice to SIPP are almost exactly £50K, on which I pay 20% tax. My remaining earnings are dividends for which I'm taxed at 33.75%.
If I make additional voluntary pension contributions will I receive any rebate above the standard 20% rate on account of the 33.75% tax I'm paying?

Dazed_and_C0nfused

Possibly.

What method is being used to make the additional contributions?

Net pay

Relief at source (RAS)
Salary sacrifice 

Steve182

I was thinking of ad hoc contributions from net pay. I realise that if I did it from further salary sacrifice it would just drop the divi tax from 33.75 to 8.75 for an amount equivalent to the additional contribution.

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Edited to say that I've just looked up "relief at source" and I don't understand how that differs from net pay?

"The scheme administrator claims the basic rate tax relief from HMRC and adds it to the pension pot. This applies if the member pays tax or not.

For example, if the relevant basic rate was 20%, and a member wants to make a £100 contribution they’ll only need to pay £80 into their pension scheme. The scheme administrator reclaims £20 from HMRC and puts this into the scheme making up the pension contribution to £100."

Dazed_and_C0nfused

Net pay is where the pension contribution reduces your taxable income i.e. salary £55,000 less 10% net pay contribution = taxable pay/salary of £49,500.  No tax relief is added to the pension contribution.

Relief at source contributions don't reduce so your taxable income.  But they get basic rate tax relief added by the pension company and they increase your basic rate tax band, which can save some higher rate tax.  

For example if you contribute £3,000 using RAS the pension company (courtesy of HMRC) will add £750 in tax relief making a gross contribution of £3,750.  But your taxable income would still be £55,000 (using the example above).

So which will you be using?

Steve182

My preference would be RAS as it's easy to do ad hoc. 

Dazed_and_C0nfused

Steve182 said:

My preference would be RAS as it's easy to do ad hoc. 

In that case this is an example of how I think it would work, using £50k as your taxable earnings as the starting point.

Let's say you contribute £3,000 net so £3,750 gross.

Your basic rate band will be increased from £37,700 to £41,450.

Your earnings will be reduced by the Personal Allowance leaving £37,430 taxed at basic rate.  And £4,020 of the basic rate band remains unused.

The first £2,000 of dividend income will be taxed at 0% but use some of the basic rate band.  Leavings £2,020 of the basic rate to be used by the next £2,020 of dividend income.

So you will only start paying 33.75% above that.

Steve182

Thanks for your help. I think I've got this.

So in this example for £3000 net I would see £750 (basic 20% relief) applied by my pension provider then for £2020 I'd see my divi tax reduced from 33.75 to 8.75%

However if I increased the £3000 net to £6000 net (£7,500 gross) then £4020 + an extra £3750 = £7770 basic rate is unused. With £2000 @ 0% the next £5,770 would be at 8.75%.

So ignoring the initial £2K @ 0% for the moment, my tax relief would effectively be 20% RAS and 25% reduction in divi tax (33.75% less 8.75%), so actually 45% overall to reflect the 25% difference in divi tax levels?

Steve182

I've done some further research and I now think my favoured approach will be salary sacrifice instead of RAS, which will also allow me to reduce NI contributions.

I've used this online calculator which I hope is accurate - https://www.income-tax.co.uk/after-tax/50000/

Three scenarios -


£50K PAYE, £20K divi's, no additional pension contribution, take home pay £51,704 -





£50K PAYE, £20K divi's, £9.6K net (£12K gross) RAS pension contribution, take home pay £44,072 -




£50K PAYE, £20K divi's, £12K salary sacrifice pension contributions, take home pay £46,262 -




So for salary sacrifice my £12K pension contribution is actually only costing me £5,442 of take home pay.

The next question is how to fund this without falling foul of recycling rules and while mitigating the increased risk of exceeding LTA. I'll post a separate thread on the pension board about that.

Grumpy_chap

Steve182 said:

The next question is how to fund this without falling foul of recycling rules 

Have you already crystalised some of your pension, or are you already drawing DB pension?  I did not note that from earlier comments in the thread (but may have missed it).

Steve182

Grumpy_chap said:

Steve182 said:

The next question is how to fund this without falling foul of recycling rules 

Have you already crystalised some of your pension, or are you already drawing DB pension?  I did not note that from earlier comments in the thread (but may have missed it).

No I turn 55 in Jan 2024 which will be my earliest opportunity to access TFLS