Pension Contributions Fall Under Taper - Options

munromagic

Hello,

My earnings are such that I am subjet to the taper on pension contributions, however, currently my own contribution coupled with my employers mean that I am going to be paying tax on pension contributions this tax year having exhausted all carry forward. Whils this is painful I figure it's the price to pay to get those funds into my pension for the future; my logic being that I am going to get taxed the same amount anyway if I reduce my pension contributions and take the extra salary as income. However, part of me wonders whether reducing the pension contributions and taking the extra as income is the right thing to do and then use the extra £ to pay of the mortgage (as opposed to it going into the pension fund). From what I can see is that I am going to get taxed the same either way unless I am missing something. Any comments / thoughts most welcome.

Best,
s

Marcon

munromagic said:

Hello,

My earnings are such that I am subjet to the taper on pension contributions, however, currently my own contribution coupled with my employers mean that I am going to be paying tax on pension contributions this tax year having exhausted all carry forward. Whils this is painful I figure it's the price to pay to get those funds into my pension for the future; my logic being that I am going to get taxed the same amount anyway if I reduce my pension contributions and take the extra salary as income. However, part of me wonders whether reducing the pension contributions and taking the extra as income is the right thing to do and then use the extra £ to pay of the mortgage (as opposed to it going into the pension fund). From what I can see is that I am going to get taxed the same either way unless I am missing something. Any comments / thoughts most welcome.

Best,
s

That might sound a simple question, but there's virtually no information which would enable anyone here to give any sort of well-informed opinion. Earnings, age, attitude to risk, mortgage costs etc - they all play a crucial part.

Given the amount you need to be earning for taper relief to apply, it might be better to seek informed advice from an IFA, based on a full understanding of all your circumstances and taking into account the forthcoming changes announced in last month's budget. 

EdSwippet

munromagic said:

... Whilst this is painful I figure it's the price to pay to get those funds into my pension for the future; my logic being that I am going to get taxed the same amount anyway if I reduce my pension contributions and take the extra salary as income. ... From what I can see is that I am going to get taxed the same either way unless I am missing something. 

Are you sure about this? You pay tax on contributions above the annual allowance at your marginal rate for the year, so likely 40 % or 45%. So far so good. What it looks like you are missing is that this money is also almost certainly going to be taxed a second time when you withdraw it in future.

That might be a blended 15% if in basic rate tax and you have 25% PCLS remaining -- that is,  25% tax free and 20% on the rest -- but it could well be at 40% if in higher rate tax and you have exceeded the PCLS limit. For example, at 40% on contributions and 30% again (blended, higher rate tax less 25% tax-free) on withdrawals, a £100 contribution costs you £40 in tax now, and £30 in tax again on withdrawal, leaving you just £30 from £100 earned. Not a winner. Even at basic rate tax on withdrawal, and with remaining PCLS, you're left with only £45 out of £100 earned.

There is a nuance to this if you can use 'scheme pays' to pay the tax on contributions from inside the pension. A provider only has to offer this where you exceed the standard £40,000, not any tapered allowance, so you might not get it. Even if you do, you often still come out behind. Contribute £100 and pay £40 with 'scheme pays' leaves £60 in the pension. Withdraw this at a blended 30% tax leaves £42, or 15% tax in basic rate leaves £51. Again, both of these are worse than if you hadn't made the pension contribution at all.

To find your exact position, you need to work through the numbers, both your current tax + NI rate, and employer match and salary sacrifice uplift, and so on, investigate whether your scheme would let you use 'scheme pays', and then guess your tax rate on withdrawals. There may be edge cases where contributions above the annual allowance are worthwhile, for example a strong requirement to avoid inheritance tax, but the chances are that you aren't in one of them.