Tax Avoidance/Pension Payment

Mike2527

Hi, 

I’m trying to work out how much to pay into my pension to avoid tax liabilities.  With a bonus payment my annual salary (end March) will amount to £120k.  My standard salary is below £100k.    Is there a method/calculator that I can use to help me reduce my liability and therefore determine the amount to pay into my pension (this month) I was caught out a couple of years ago and ended up paying HMRC £5k.  All advice welcomed.

Mike

r6mile

You will probably want to reduce your "annual net income" (ie gross income minus pension contributions) to below 100k, as the 100-120k rate is punishing as that is when the personal allowance starts to get withdrawn. (And if you are in receipt of Tax Free Childcare, or 30h free hours etc then you lose it all in one go which is horrendous).

So I would look at what pension contributions you have already made this tax year, and increase them to whatever brings your 'annual net income' below 100k.

Mike2527

Thanks.  Childcare etc are not an issue for me.

Bringing my annual net income to below £100k wipes out my net bonus and then some!  I recognise it’s going to my pension but disappointing that I won’t get any benefit from it in the here and now.  Wow! 

Thanks vm for your advice.  Cheers. 

sheramber

Then pay extra tax and get some of your bonus.

Albermarle

sheramber said:

Then pay extra tax and get some of your bonus.

Yes, you can't have your cake and eat it !

Steve_666_

The more you put into your pension now, the more grateful your future self will be!

Grumpy_chap

Mike2527 said:

Hi, 

I’m trying to work out how much to pay into my pension to avoid tax liabilities.  With a bonus payment my annual salary (end March) will amount to £120k.  My standard salary is below £100k.    Is there a method/calculator that I can use to help me reduce my liability and therefore determine the amount to pay into my pension (this month) I was caught out a couple of years ago and ended up paying HMRC £5k.  All advice welcomed.

Mike

What you pay into your pension has to also consider your available Annual Allowance (usually £40k) and any available carry-forward.  It is possible, depending on past pension contributions, to make total pension contributions of £160k in one year (and only for one year).  If that applies to you, the amount to pay into the pension to avoid tax liabilities would be to bring ANI down to your personal allowance.

Your subsequent comments suggest that will not be amenable to you.

As others said, it would be highly pragmatic to make sufficient pension contributions to bring your ANI to below £100k.  You noted that will wipe out all of your bonus and it would be nice to have some now.  The whole of that £20k above £100k will be at an effective marginal tax rate of 62% if drawn now (income tax plus NI, assuming you are not in Scotland for tax purposes).  

You could look at your bonus as potentially funding your future early retirement.  I'd be very grateful for a bonus like that.

trust.no.1

Albermarle said:

sheramber said:

Then pay extra tax and get some of your bonus.

Yes, you can't have your cake and eat it !

Some of us older folks that are near to retirement age can