Keeping net adjusted income below £100K

mortgageadviceda

Hi I’m hoping someone can help.

Currently my net adjusted income (salary and car allowance less salary sacrifice pension) is £97K.

I have a drive to stay below £100K since we are adopting a child and would like to benefit from 30 free hours childcare and tax free childcare.Also, I’d obviously like to avoid the 60% tax trap. 

The “issue” I face (issue is wrong word, I appreciate I am very fortunate) is I could receive a bonus of up to £40K. Not confirmed but a possibility. This takes me over £100K.

My plan is to salary sacrifice it to my pension hence it doesn’t count in my net adjusted income , keeping me below 100K and allowing me access to the childcare benefits. And stops me paying 60% tax on it.

However because my employer has a very generous pension scheme this would take me over my £60K annual pension saving limit (probably by 15K) next year and I have no spare allowance from previous years. my pension would therefore be subject to tax.

questions I have are:

*am I right in what I say.
* is it ok to breach the £60K personal limit and pay tax on pension whilst staying below the £100K net adjusted income figure?
* does the situation in the bullet  point above still allow me to benefit from the childcare benefit?
*how much tax would I pay on my pension and is this done automatically?
* would I need to do a self return as my net adjusted income would below £100K abut my pension breaches the personal annual limit?
* ps is my calculation for net adjusted income correct. It’s essentially my taxable pay as shown on my pay slip.

many thanks for your help and any advice would be great.

kinger101

Some people will get to a point where there adjusted net income will exceed the £100K, even if they fully use all their pension.  One option you might be able to explore is "bonus sacrifice".

If you're normally paid your bonus in March, it's possible that by sacrificing some or all of it, the pension contribution wouldn't be made until after 6th April following year (it's what I've done this year).  Of course, it might then mean you face the problem in the subsequent year, but getting the nursery hours every other year is better than none.

Another option is to see if there are other sal. sac. schemes available at your employer (extra leave, bikes, electric cars) which you could use.

If you're sill likely to be over, one thing worth doing is working out the how much pre-tax income you'd need to cover the 15 hours (and potentially the £2K tax-free childcare) you'd lose by going over £100K.  The one thing you don't want to do is have an adjusted net income of £101K, and then need £10K of pre-tax income to cover what you've lost.  1000% marginal rates are not fun.  Technically, that can still be avoided as you can make gift-aid contributions (even after the tax year-end) to shift your ANI back down to <£100K.  But you need to work out the point at which you ar4 letting the tail wag the dog.

mortgageadviceda

kinger101 said:

Some people will get to a point where there adjusted net income will exceed the £100K, even if they fully use all their pension.  One option you might be able to explore is "bonus sacrifice".

If you're normally paid your bonus in March, it's possible that by sacrificing some or all of it, the pension contribution wouldn't be made until after 6th April following year (it's what I've done this year).  Of course, it might then mean you face the problem in the subsequent year, but getting the nursery hours every other year is better than none.

Another option is to see if there are other sal. sac. schemes available at your employer (extra leave, bikes, electric cars) which you could use.

If you're sill likely to be over, one thing worth doing is working out the how much pre-tax income you'd need to cover the 15 hours (and potentially the £2K tax-free childcare) you'd lose by going over £100K.  The one thing you don't want to do is have an adjusted net income of £101K, and then need £10K of pre-tax income to cover what you've lost.  1000% marginal rates are not fun.  Technically, that can still be avoided as you can make gift-aid contributions (even after the tax year-end) to shift your ANI back down to <£100K.  But you need to work out the point at which you ar4 letting the tail wag the dog.

Thanks for your comment. It’s helpful.

I would definitely look to do the bonus sacrifice scheme. my bonus is July though.I have a way to stay below 100K (through this and additional one off pension contributions) but my worry is my pension then exceeds the 60K pension limit. 

The questions I am still not clear on are:

* is it ok to breach the £60K personal pension limit and pay tax on pension whilst staying below the £100K net adjusted income figure? Or does the amount above the 60K pension limit then count on to my net adjusted income and therefore take me back over 100K?
* does the situation in the bullet  point above still allow me to benefit from the childcare benefit?
*how much tax would I pay on my pension and is this done automatically?
* would I need to do a self return as my net adjusted income would below £100K abut my pension breaches the personal annual limit?

About your comment on a gift aid donation I did think about this is if I was to go slightly over as it would probably outweigh the 15 hours and £2K tax free child care. You say you can do this after the tax year? How? Wouldn’t that then count to the next tax year?

many thanks 

Jeremy535897

The limit rises to £60,000 from 6 April 2023, assuming that the measure is enacted. Presumably you have no unused allowance brought forward?

The tax calculation to arrive at the rate tax is charged is complex, but that chargeable amount does not increase your adjusted net income. See https://library.croneri.co.uk/cch_uk/etc/10714c for how to work it out.

You can ask the pension scheme to pay the tax if it exceeds £2,000.

Section 426 ITA 2007 allows you to carry back a gift aid donation to the previous tax year, provided that an election is made on or before the date the prior year tax return is submitted, and before the normal filing deadline for that return.

mortgageadviceda

Jeremy535897 said:

The limit rises to £60,000 from 6 April 2023, assuming that the measure is enacted. Presumably you have no unused allowance brought forward?

The tax calculation to arrive at the rate tax is charged is complex, but that chargeable amount does not increase your adjusted net income. See https://library.croneri.co.uk/cch_uk/etc/10714c for how to work it out.

You can ask the pension scheme to pay the tax if it exceeds £2,000.

Section 426 ITA 2007 allows you to carry back a gift aid donation to the previous tax year, provided that an election is made on or before the date the prior year tax return is submitted, and before the normal filing deadline for that return.

Thank you again for this - massively helpful.

So reading above, I can remain below the £100K net adjusted income to benefit from tax free child care and the free child care hours and avoid the 60% tax trap - whilst going over the £60K personal pension allowance and paying tax just on the amount above £60K? This seems too good to be true?

Next year I will have a bigger personal allowance as I will have carried some over. My concern is the year after as even after i've sacrificed the bonus (and had a pay increase), I will have to make an extra pension contribution (s) at some point in the year to ensure I remain under £100K for the net adjusted income and free childcare. At this point, it's possible I will breach the £60K pension limit to maintain <£100K.

I've tried to click on the link to see how the tax is calculated but you need to be a member. I assume it's just tax on the amount over £60K and I assume it's not more than 60% which makes this a more favourable route than not putting in pension as I would be paying effectively 60% tax and missing out on free childcare?

I hope I'm understanding this correctly? What's the catch!?

Thank you!

Jeremy535897

This takes you through all the steps that you need to take:
https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm056110

This confirms the point about not losing personal allowances:
https://www.mandg.com/pru/adviser/en-gb/insights-events/insights-library/interaction-of-tax-relief-and-annual-allowance

"To calculate the relevant tax charge, the AA excess is added to other income to determine the tax rate which applies. Although the charge is to income tax, the amount is not income for tax purposes and therefore the member cannot offset any allowances, losses or relief against it. Similarly it will not lead to a loss of allowances, such as losing the personal allowance."

Paying too much and breaching the annual allowance only gives rise to a charge on the excess, not the whole contribution. You also have to watch the LTA (although if the budget is enacted that won't be a concern from 2023/24).

kinger101

Thanks Jeremy.  That's useful information.  I will use it to reassess my own situation.  The downside is the income will effectively be taxed twice, but at least the total will not exceed 100 percent.

mortgageadviceda

Jeremy535897 said:

This takes you through all the steps that you need to take:
https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm056110

This confirms the point about not losing personal allowances:
https://www.mandg.com/pru/adviser/en-gb/insights-events/insights-library/interaction-of-tax-relief-and-annual-allowance

"To calculate the relevant tax charge, the AA excess is added to other income to determine the tax rate which applies. Although the charge is to income tax, the amount is not income for tax purposes and therefore the member cannot offset any allowances, losses or relief against it. Similarly it will not lead to a loss of allowances, such as losing the personal allowance."

Paying too much and breaching the annual allowance only gives rise to a charge on the excess, not the whole contribution. You also have to watch the LTA (although if the budget is enacted that won't be a concern from 2023/24).

This is all really useful stuff. Thank you.

I'm not sure i understand the comment about being taxed twice? If you are on a salary sacrifice scheme surely you're not taxed first time and just pay the tax from exceeding the pension allowance?

If i understand this correctly, they take you net adjusted income (say £99K) and then add to it the excess of your pension contribution (say £20K) taking to £119K. Based on this £20K would be taxed at 40% tax rate. If you exceed 150K this would go to 45% etc. What I'm not clear on is do you lose your personal allowance? If this was like income tax, you would pay 40% tax on the amount over £100K but also then lose £10K of the personal allowance and pay 40% on this too?

If it doesn't affect personal allowance, this is a much more favourable option? Here you are essentially paying 40% on the 19K. If you kept it in your salary, you would be paying 60% as you'd lose your personal allowance?

Plus you get to keep childcare benefits - tax free and free hours?!

I think I understand this?

Jeremy535897

mortgageadviceda said:

Jeremy535897 said:

This takes you through all the steps that you need to take:
https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm056110

This confirms the point about not losing personal allowances:
https://www.mandg.com/pru/adviser/en-gb/insights-events/insights-library/interaction-of-tax-relief-and-annual-allowance

"To calculate the relevant tax charge, the AA excess is added to other income to determine the tax rate which applies. Although the charge is to income tax, the amount is not income for tax purposes and therefore the member cannot offset any allowances, losses or relief against it. Similarly it will not lead to a loss of allowances, such as losing the personal allowance."

Paying too much and breaching the annual allowance only gives rise to a charge on the excess, not the whole contribution. You also have to watch the LTA (although if the budget is enacted that won't be a concern from 2023/24).

This is all really useful stuff. Thank you.

I'm not sure i understand the comment about being taxed twice? If you are on a salary sacrifice scheme surely you're not taxed first time and just pay the tax from exceeding the pension allowance?

If i understand this correctly, they take you net adjusted income (say £99K) and then add to it the excess of your pension contribution (say £20K) taking to £119K. Based on this £20K would be taxed at 40% tax rate. If you exceed 150K this would go to 45% etc. What I'm not clear on is do you lose your personal allowance? If this was like income tax, you would pay 40% tax on the amount over £100K but also then lose £10K of the personal allowance and pay 40% on this too?

If it doesn't affect personal allowance, this is a much more favourable option? Here you are essentially paying 40% on the 19K. If you kept it in your salary, you would be paying 60% as you'd lose your personal allowance?

Plus you get to keep childcare benefits - tax free and free hours?!

I think I understand this?

The comment about being taxed twice presumably relates to the fact that tax will be payable on the extra pension received in due course (although a quarter should be able to be taken as a tax free lump sum, and your rate of tax may well be lower in retirement).

mortgageadviceda

Jeremy535897 said:

mortgageadviceda said:

Jeremy535897 said:

This takes you through all the steps that you need to take:
https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm056110

This confirms the point about not losing personal allowances:
https://www.mandg.com/pru/adviser/en-gb/insights-events/insights-library/interaction-of-tax-relief-and-annual-allowance

"To calculate the relevant tax charge, the AA excess is added to other income to determine the tax rate which applies. Although the charge is to income tax, the amount is not income for tax purposes and therefore the member cannot offset any allowances, losses or relief against it. Similarly it will not lead to a loss of allowances, such as losing the personal allowance."

Paying too much and breaching the annual allowance only gives rise to a charge on the excess, not the whole contribution. You also have to watch the LTA (although if the budget is enacted that won't be a concern from 2023/24).

This is all really useful stuff. Thank you.

I'm not sure i understand the comment about being taxed twice? If you are on a salary sacrifice scheme surely you're not taxed first time and just pay the tax from exceeding the pension allowance?

If i understand this correctly, they take you net adjusted income (say £99K) and then add to it the excess of your pension contribution (say £20K) taking to £119K. Based on this £20K would be taxed at 40% tax rate. If you exceed 150K this would go to 45% etc. What I'm not clear on is do you lose your personal allowance? If this was like income tax, you would pay 40% tax on the amount over £100K but also then lose £10K of the personal allowance and pay 40% on this too?

If it doesn't affect personal allowance, this is a much more favourable option? Here you are essentially paying 40% on the 19K. If you kept it in your salary, you would be paying 60% as you'd lose your personal allowance?

Plus you get to keep childcare benefits - tax free and free hours?!

I think I understand this?

The comment about being taxed twice presumably relates to the fact that tax will be payable on the extra pension received in due course (although a quarter should be able to be taken as a tax free lump sum, and your rate of tax may well be lower in retirement).

Still better than being in the 60% tax trap, paying tax here, and being subject to losing out on tax free childcare and free childcare hours. Seems a no brainer! Thank you!

Complex

Hi all,

Really interesting discussion. Can I just check my understanding from the above with a 'basic' example on the assumption there is no carry forward available: 

Salary - £164,000
Pension (via salary sacrifice) - £65,000 (£5,000 above pension tax-free allowance). 

Is the net adjusted salary for the above £99,000 for the purposes of tax free childcare? 

You would then separately pay 40% tax on the £5,000 that exceeds the pension tax-free allowance threshold? 

Thanks!