Effect on tax position when making additional pension contributions.

Sinc19

Hi. Hoping someone can provide some personal tax advice.
If someone made additional contributions into a personal pension plan (or a workplace pension plan), what effect does this have on that person’s tax position? Could it have the effect of moving them out of higher rate tax band, and into the personal rate tax bands? If that’s true, would their savings allowance double from £500 back to the standard £1k?
Thanks.

Dazed_and_C0nfused

Yes, pension contributions can move you from the higher rate tax band to basic rate.

But as ever with tax it's all about the facts.

If they are RAS (relief at source) source contributions then the gross contribution increases your basic rate band rather then reducing your taxable income.

Don't forget that there could be some higher rate tax relief to claim as well as the potential change to the savings nil rate band (aka PSA).

And you can become eligible for Marriage Allowance.

Albermarle

If you make contributions to a personal pension plan, the provider will add basic rate tax relief automatically. 

However with a workplace pension there are three different ways to make contributions.
From already taxed pay
from Before tax pay
by salary sacrifice.

Do you know which one your employer uses?

Sinc19

Albermarle said:

If you make contributions to a personal pension plan, the provider will add basic rate tax relief automatically. 

However with a workplace pension there are three different ways to make contributions.
From already taxed pay
from Before tax pay
by salary sacrifice.

Do you know which one your employer uses?

The workplace pension is salary sacrifice. If a lump sum payment was made out of savings to a salary sacrifice workplace pension, how would any tax relief be obtained? Via a self assessment tax return?

Sinc19

Dazed_and_C0nfused said:

Yes, pension contributions can move you from the higher rate tax band to basic rate.

But as ever with tax it's all about the facts.

If they are RAS (relief at source) source contributions then the gross contribution increases your basic rate band rather then reducing your taxable income.

Don't forget that there could be some higher rate tax relief to claim as well as the potential change to the savings nil rate band (aka PSA).

And you can become eligible for Marriage Allowance.

How would one know if the contributions are “relief at source”?
What is the advantage of increasing the basic rate band instead of reducing taxable income?

xylophone

Re Relief at Source and Net Pay.

https://www.litrg.org.uk/tax-guides/tax-basics/do-i-have-join-pension-scheme/do-you-know-how-tax-relief-your-pension

Let's suppose  John Brown's total income is his salary of £60,270 a year.

 In terms of his tax liability, £12,570 is tax free, £37,700 is taxable at basic rate (20%) and £10,000 is taxable at higher rate (40%).


 His pension provider operates "relief at source".

If he wishes to make a  contribution of £10,000 to his pension, he actually pays in only £8000 - the pension provider claims tax relief of £2000 and adds it to his pot.

The gross  pension contribution is thus £10,000.  He reports this on his self assessment.

His basic rate tax band of £37,700 is extended to £47,700.

 This provides an additional income tax saving of £2,000 in addition to the basic rate income tax relief of £2,000 he has already received. 

So, as a higher rate taxpayer  he has been able to make a gross pension contribution of £10,000 to his pension and it has cost him only £6000.

See https://www.hl.co.uk/pensions/tax-relief/calculator

Scot_39

Sinc19 said:

Albermarle said:

If you make contributions to a personal pension plan, the provider will add basic rate tax relief automatically. 

However with a workplace pension there are three different ways to make contributions.
From already taxed pay
from Before tax pay
by salary sacrifice.

Do you know which one your employer uses?

The workplace pension is salary sacrifice. If a lump sum payment was made out of savings to a salary sacrifice workplace pension, how would any tax relief be obtained? Via a self assessment tax return?

Salary sacrifice lowers your taxable income -  effectively your taxable wage drops from gross to (gross - gross pension contribution).

The pension payments are paid gross pre tax (and NI - including their NI).

Then your employer calculates and pays all tax - income tax and your ni - based on the lower salary.

Apart from no hassle of dealing with hmrc for refunds, the NI savings are the main differential / permanent, the income tax position is I believe the same in the end regardless vs paying savings direct to a relief at source scheme.

Via salary sacrifice, there would be no tax refund to claim.

But that's via payroll not from savings.

A previous employer didn't allow us to pay irregular amounts via payroll salary sacrifice  - just the agreed annual % - and of basic.

Suited 90%+ - as office based staff didn't earn overtime or get bonuses etc.

Before salary sacrifice, we could change say Feb and Mar deductions, but that was paid "after tax" into relief at source scheme, even pay them by cheque to cover NI and deductions etc - to pay in more than months salary, e.g. to avoid 40% tax.

But as after tax, just like a sipp or separate personal pension, back to claiming additional band relief via HMRC.

Just meant not sending cheque or bank transfer direct to provider. And even stopped that when outsourced payroll after a takeover. So had to go direct.

So check your employers rules.

Dazed_and_C0nfused

Sinc19 said:

Dazed_and_C0nfused said:

Yes, pension contributions can move you from the higher rate tax band to basic rate.

But as ever with tax it's all about the facts.

If they are RAS (relief at source) source contributions then the gross contribution increases your basic rate band rather then reducing your taxable income.

Don't forget that there could be some higher rate tax relief to claim as well as the potential change to the savings nil rate band (aka PSA).

And you can become eligible for Marriage Allowance.

How would one know if the contributions are “relief at source”?
What is the advantage of increasing the basic rate band instead of reducing taxable income?

Relief at source contributions have 25% added by the pension company.

Other types of contribution don't.

Ultimately it makes no difference for most people but unless you know which method is used I fail to see how you can understand your own income tax situation 😳

Albermarle

The workplace pension is salary sacrifice. If a lump sum payment was made out of savings to a salary sacrifice workplace pension, how would any tax relief be obtained? Via a self assessment tax return?

A practical point .

Your workplace pension provider is only normally getting employer payments ( which is what happens with salary sacrifice) and not adding any tax relief.

If you make a lump sum payment, you want them to add basic rate tax relief. There is a possibility that if you just make a lump sum out of the blue, it might not get treated properly. Suggest you talk to them first. It will probably be alright but worth checking.