We'd like to remind Forumites to please avoid political debate on the Forum. This is to keep it a safe and useful space for MoneySaving discussions. Threads that are - or become - political in nature may be removed in line with the Forum’s rules. Thank you for your understanding.

Keeping net adjusted income below £100K

2456

Comments

  • Jeremy535897
    Jeremy535897 Posts: 10,653 Forumite
    10,000 Posts Fourth Anniversary Photogenic Name Dropper
    That is how the links I quoted appear to explain it, yes. There are three issues:
    • no net allowance for the pension contribution made (but the interaction of the rules on childcare and personal allowance withdrawal still give a significant benefit)
    • the extra amount coming out of the pension (or at least 75% of it) will normally be taxed as income
    • if you were near to the LTA, you could be making relatively inefficient contributions in one year that stop further more tax efficient contributions in later years. Whilst the Budget eliminates that risk, Labour have threatened to reverse that if they win the next election, with Sir Keir Starmer going so far as to say that his own pension scheme from the CPS, which is currently exempt from LTA rules, would be subject to the same restrictions
  • That is how the links I quoted appear to explain it, yes. There are three issues:
    • no net allowance for the pension contribution made (but the interaction of the rules on childcare and personal allowance withdrawal still give a significant benefit)
    • the extra amount coming out of the pension (or at least 75% of it) will normally be taxed as income
    • if you were near to the LTA, you could be making relatively inefficient contributions in one year that stop further more tax efficient contributions in later years. Whilst the Budget eliminates that risk, Labour have threatened to reverse that if they win the next election, with Sir Keir Starmer going so far as to say that his own pension scheme from the CPS, which is currently exempt from LTA rules, would be subject to the same restrictions
    This is so helpful, thank you.

    Prior to posting on here I had booked some time with a financial advisor. I had the chat today. His advise has conflicted but I’m not sure if he has understood it correctly and has given false advice.

    As per the previous comment and your previous advice this is my understanding exactly. My net adjusted income would be 99K but to do that my pension contributions would be 65K. This would mean breaching by 5K but the tax would be paid separately and not impact my net adjusted income or tax free childcare. 

    However, he told me today that the 5K would then be added to my net adjusted incoming taking me to 104K hence paying 40 % tax on 1K, and 60% tax on 4K (through losing personal allowance) and this would all happen through PAYE and id not be entitled to tax free childcare or free hours.

    I think he’s wrong?! Do you agree?

    I am still confused how I’d pay the tax on the 5K separately if that still stands true and not complicate things with my net adjusted income?

    Many thanks once again. I thought I was clear but now confused again.


  • Jeremy535897
    Jeremy535897 Posts: 10,653 Forumite
    10,000 Posts Fourth Anniversary Photogenic Name Dropper
    From the link to the Prudential I mentioned earlier:

    "As always, there will be exceptions to the rule. There may still be a net overall benefit for an individual to pay a personal contribution that actually causes them to have an annual allowance excess. A few planning angles could include an individual wanting to pay a larger pension contribution to get them out of the child benefit or personal allowance tax traps, or to reduce their threshold income to avoid a tapered annual allowance etc. 

    You always need to apply the tax relief rules to work out the maximum personal contribution which would be allowed tax relief, but it is equally important to go on to check the available annual allowance. Doing both tests, and possibly revising the plan within the tax year if appropriate, is the only way to ensure any pension savings are made as tax efficiently as possible."

    The Croner example says:

    "Adele earns £150,000 and has taxable savings of £2,500. She has a money-purchase pension scheme to which her employer also makes contributions. She has not flexibly accessed benefits from the scheme.

    Each year, Adele makes a contribution of £32,000 to her scheme, under relief at source. Adele’s gross contribution is thus £40,000. Her employer contributes £15,000 to the scheme, so her total pension inputs are £55,000.

    Adele is not a ‘high-income individual’ (see ¶10710A), so her annual allowance is £40,000. Her chargeable amount is therefore £15,000.

    Step 1

    Adele’s adjusted net income is £150,000 + £2,500 − £40,000 = £112,500. Her personal allowance is therefore £12,570 − (£112,500 − £100,000) × 0.5 = £6,320.

    Adele’s reduced net income is thus £150,000 + £2,500 − £6,320 = £146,180.

    Step 2

    Adding her chargeable amount to this yields a sum of £161,180.

    Step 3

    Adele’s basic-rate limit is £37,700 + £40,000 = £77,700. Her higher-rate limit is £150,000 + £40,000 = £190,000. The entire £15,000 lies within Adele’s adjusted higher-rate band, so the appropriate rate is 40%.

    Adele’s annual-allowance charge is thus £15,000 × 40% = £6,000"

    In your example, adjusted net income is £99,000 for childcare and personal allowance purposes, and you pay 40% tax on the £5,000 annual allowance charge. You disclose the charge on the last page of SA101.

    The annual allowance charge is set out in section 227 FA 2004. It is not income, so it requires a special charging provision. That is why it does not form part of adjusted net income.

  • That is how the links I quoted appear to explain it, yes. There are three issues:
    • no net allowance for the pension contribution made (but the interaction of the rules on childcare and personal allowance withdrawal still give a significant benefit)
    • the extra amount coming out of the pension (or at least 75% of it) will normally be taxed as income
    • if you were near to the LTA, you could be making relatively inefficient contributions in one year that stop further more tax efficient contributions in later years. Whilst the Budget eliminates that risk, Labour have threatened to reverse that if they win the next election, with Sir Keir Starmer going so far as to say that his own pension scheme from the CPS, which is currently exempt from LTA rules, would be subject to the same restrictions
    This is so helpful, thank you.

    Prior to posting on here I had booked some time with a financial advisor. I had the chat today. His advise has conflicted but I’m not sure if he has understood it correctly and has given false advice.

    As per the previous comment and your previous advice this is my understanding exactly. My net adjusted income would be 99K but to do that my pension contributions would be 65K. This would mean breaching by 5K but the tax would be paid separately and not impact my net adjusted income or tax free childcare. 

    However, he told me today that the 5K would then be added to my net adjusted incoming taking me to 104K hence paying 40 % tax on 1K, and 60% tax on 4K (through losing personal allowance) and this would all happen through PAYE and id not be entitled to tax free childcare or free hours.

    I think he’s wrong?! Do you agree?

    I am still confused how I’d pay the tax on the 5K separately if that still stands true and not complicate things with my net adjusted income?

    Many thanks once again. I thought I was clear but now confused again.


    I'll bow to Jeremy for the full detail but this certainly wouldn't all happen through PAYE!
  • Jeremy535897
    Jeremy535897 Posts: 10,653 Forumite
    10,000 Posts Fourth Anniversary Photogenic Name Dropper
    No, self assessment (additional form SA101) as mentioned earlier (pension savings tax charges on last page):
    https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1063610/sa101-2022.pdf
  • That is how the links I quoted appear to explain it, yes. There are three issues:
    • no net allowance for the pension contribution made (but the interaction of the rules on childcare and personal allowance withdrawal still give a significant benefit)
    • the extra amount coming out of the pension (or at least 75% of it) will normally be taxed as income
    • if you were near to the LTA, you could be making relatively inefficient contributions in one year that stop further more tax efficient contributions in later years. Whilst the Budget eliminates that risk, Labour have threatened to reverse that if they win the next election, with Sir Keir Starmer going so far as to say that his own pension scheme from the CPS, which is currently exempt from LTA rules, would be subject to the same restrictions
    This is so helpful, thank you.

    Prior to posting on here I had booked some time with a financial advisor. I had the chat today. His advise has conflicted but I’m not sure if he has understood it correctly and has given false advice.

    As per the previous comment and your previous advice this is my understanding exactly. My net adjusted income would be 99K but to do that my pension contributions would be 65K. This would mean breaching by 5K but the tax would be paid separately and not impact my net adjusted income or tax free childcare. 

    However, he told me today that the 5K would then be added to my net adjusted incoming taking me to 104K hence paying 40 % tax on 1K, and 60% tax on 4K (through losing personal allowance) and this would all happen through PAYE and id not be entitled to tax free childcare or free hours.

    I think he’s wrong?! Do you agree?

    I am still confused how I’d pay the tax on the 5K separately if that still stands true and not complicate things with my net adjusted income?

    Many thanks once again. I thought I was clear but now confused again.


    The charge is paid through self-assessment but not in the normal manner. The help sheet is here:

     https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1062937/HS345-WS-2022.pdf

    When one gets to the tax calculation summary page there appears a box in which to enter the tax charge. Details as to how this was calculated should be entered in the additional information box. 
  • From the link to the Prudential I mentioned earlier:

    "As always, there will be exceptions to the rule. There may still be a net overall benefit for an individual to pay a personal contribution that actually causes them to have an annual allowance excess. A few planning angles could include an individual wanting to pay a larger pension contribution to get them out of the child benefit or personal allowance tax traps, or to reduce their threshold income to avoid a tapered annual allowance etc. 

    You always need to apply the tax relief rules to work out the maximum personal contribution which would be allowed tax relief, but it is equally important to go on to check the available annual allowance. Doing both tests, and possibly revising the plan within the tax year if appropriate, is the only way to ensure any pension savings are made as tax efficiently as possible."

    The Croner example says:

    "Adele earns £150,000 and has taxable savings of £2,500. She has a money-purchase pension scheme to which her employer also makes contributions. She has not flexibly accessed benefits from the scheme.

    Each year, Adele makes a contribution of £32,000 to her scheme, under relief at source. Adele’s gross contribution is thus £40,000. Her employer contributes £15,000 to the scheme, so her total pension inputs are £55,000.

    Adele is not a ‘high-income individual’ (see ¶10710A), so her annual allowance is £40,000. Her chargeable amount is therefore £15,000.

    Step 1

    Adele’s adjusted net income is £150,000 + £2,500 − £40,000 = £112,500. Her personal allowance is therefore £12,570 − (£112,500 − £100,000) × 0.5 = £6,320.

    Adele’s reduced net income is thus £150,000 + £2,500 − £6,320 = £146,180.

    Step 2

    Adding her chargeable amount to this yields a sum of £161,180.

    Step 3

    Adele’s basic-rate limit is £37,700 + £40,000 = £77,700. Her higher-rate limit is £150,000 + £40,000 = £190,000. The entire £15,000 lies within Adele’s adjusted higher-rate band, so the appropriate rate is 40%.

    Adele’s annual-allowance charge is thus £15,000 × 40% = £6,000"

    In your example, adjusted net income is £99,000 for childcare and personal allowance purposes, and you pay 40% tax on the £5,000 annual allowance charge. You disclose the charge on the last page of SA101.

    The annual allowance charge is set out in section 227 FA 2004. It is not income, so it requires a special charging provision. That is why it does not form part of adjusted net income.

    This forum really is superb. It appears I wasted money on financial advice as they've given me the completely wrong advice.

    From this, i am now clear that i can keep my net adjusted income below £100K to keep child care benefits whilst breaching my annual pension allowance and only paying tax on this.

    Reading around my pension, I think my pension provider would pay the tax through the pension scheme if was to breach my annual allowance. In that circumstance would i still be required to do a self assessment return as i would have already paid the tax (and my net adjusted income is <£100K). I do notice on the form you linked that there is a box to enter the amount over the annual allowance you are, but then also the tax paid through the pension provider. So i imagine if you enter in this box, you won't be charged twice.

    Thank you once again Jeremy and everybody else that has contributed. I think i'm clear and i now can now manage this myself without the help of an accountant?
  • If your taxable income is £100k or more then yes you need to complete a Self Assessment return irrespective of whether any tax is owed or not.
  • If your taxable income is £100k or more then yes you need to complete a Self Assessment return irrespective of whether any tax is owed or not.
    my net adjusted income will be less than 100K. My annual pension allowance will be over the annual limit amount
  • From the link to the Prudential I mentioned earlier:

    "As always, there will be exceptions to the rule. There may still be a net overall benefit for an individual to pay a personal contribution that actually causes them to have an annual allowance excess. A few planning angles could include an individual wanting to pay a larger pension contribution to get them out of the child benefit or personal allowance tax traps, or to reduce their threshold income to avoid a tapered annual allowance etc. 

    You always need to apply the tax relief rules to work out the maximum personal contribution which would be allowed tax relief, but it is equally important to go on to check the available annual allowance. Doing both tests, and possibly revising the plan within the tax year if appropriate, is the only way to ensure any pension savings are made as tax efficiently as possible."

    The Croner example says:

    "Adele earns £150,000 and has taxable savings of £2,500. She has a money-purchase pension scheme to which her employer also makes contributions. She has not flexibly accessed benefits from the scheme.

    Each year, Adele makes a contribution of £32,000 to her scheme, under relief at source. Adele’s gross contribution is thus £40,000. Her employer contributes £15,000 to the scheme, so her total pension inputs are £55,000.

    Adele is not a ‘high-income individual’ (see ¶10710A), so her annual allowance is £40,000. Her chargeable amount is therefore £15,000.

    Step 1

    Adele’s adjusted net income is £150,000 + £2,500 − £40,000 = £112,500. Her personal allowance is therefore £12,570 − (£112,500 − £100,000) × 0.5 = £6,320.

    Adele’s reduced net income is thus £150,000 + £2,500 − £6,320 = £146,180.

    Step 2

    Adding her chargeable amount to this yields a sum of £161,180.

    Step 3

    Adele’s basic-rate limit is £37,700 + £40,000 = £77,700. Her higher-rate limit is £150,000 + £40,000 = £190,000. The entire £15,000 lies within Adele’s adjusted higher-rate band, so the appropriate rate is 40%.

    Adele’s annual-allowance charge is thus £15,000 × 40% = £6,000"

    In your example, adjusted net income is £99,000 for childcare and personal allowance purposes, and you pay 40% tax on the £5,000 annual allowance charge. You disclose the charge on the last page of SA101.

    The annual allowance charge is set out in section 227 FA 2004. It is not income, so it requires a special charging provision. That is why it does not form part of adjusted net income.

    This forum really is superb. It appears I wasted money on financial advice as they've given me the completely wrong advice.

    From this, i am now clear that i can keep my net adjusted income below £100K to keep child care benefits whilst breaching my annual pension allowance and only paying tax on this.

    Reading around my pension, I think my pension provider would pay the tax through the pension scheme if was to breach my annual allowance. In that circumstance would i still be required to do a self assessment return as i would have already paid the tax (and my net adjusted income is <£100K). I do notice on the form you linked that there is a box to enter the amount over the annual allowance you are, but then also the tax paid through the pension provider. So i imagine if you enter in this box, you won't be charged twice.

    Thank you once again Jeremy and everybody else that has contributed. I think i'm clear and i now can now manage this myself without the help of an accountant?
    UPDATE: just had a response from the financial advisor stating:

    My apologies I see what you’re saying. It is quite a rare one, not had this situation before, and to be honest using carry forward should help you to not be in this situation. However in the example you give, then yes, your net adjusted income would go back above £100k because the over-funding of the pension would add to your net adjusted income (leading to a potential loss of child care funding).

    Can we categorically say this is incorrect based on the advice above? So confused. From everything shared here, I believe he is wrong.
Meet your Ambassadors

🚀 Getting Started

Hi new member!

Our Getting Started Guide will help you get the most out of the Forum

Categories

  • All Categories
  • 348.2K Banking & Borrowing
  • 252.1K Reduce Debt & Boost Income
  • 452.3K Spending & Discounts
  • 240.8K Work, Benefits & Business
  • 617K Mortgages, Homes & Bills
  • 175.6K Life & Family
  • 254K Travel & Transport
  • 1.5M Hobbies & Leisure
  • 16K Discuss & Feedback
  • 15.1K Coronavirus Support Boards

Is this how you want to be seen?

We see you are using a default avatar. It takes only a few seconds to pick a picture.