Increasing pension payments vs higher tax/losing child benefit

Gurk

Hi all, I'm a noob here....apologies if this isn't in the correct place!

I am 37 year old earning 59k per annum. I have two small children aged 2 and 4 years old, and so my wife receives child benefit payments for them - I believe this is approx £2070 annually. My wife works part time and earns less than half of what I do.
I have been contributing the 9k per annum out of my salary into my pension via salary sacrifice in order to a) reduce higher rate tax payments and b) allow us to keep the entirety of our child benefit.  My pension was Scottish Widows but has recently changed to the Mercer Master Trust. My work also contribute 8.5% of my salary, and my wife is on a teachers pension too.

Is this wise? We get by reasonably comfortably despite recent hikes in everything that has affected us all. My basic way of thinking was that by 'sacrificing' the extra £9k per year, we get back £2k ish through child benefit anyway, and also don't lose out on the extra tax that I would have to pay. If I were to take the extra £9k in salary, I'd only bring home about £3400 of it once tax and loss of benefit have been considered. On a simplistic level it sounds like the sensible thing to do, however my salary will be going up considerably over the next couple of years, and will be on around 65k in two years time - would paying 15k per year into my salary be sensible given that it would be over 20% of my salary? Are pensions worth that amount of trust/investment?

Hope I've made sense and that somebody cleverer than me can reassure me. Thank you.

atush

Keep paying into your pension, reducing tax and keeping the CB in full.

If you are still comfortable with the income at present, consider investing the CB into Junior Isas for the kids 
(investments not cash) for the children.  Do you both have isas?  If not open some.  If you have cahs savings of at least 6 months outgoings, put them in investments.

If you have cash and Isas, have your wife investigate AVCs with her techers pension.

Dazed_and_C0nfused

If you can afford it then it's extremely tax efficient to sacrifice the £9k.

But don't forget HICBC is based on adjusted net income not just earnings.

So post sacrifice taxable pay of £50,000 plus interest of say £500 and dividends of £500 would be ANI of £51,000 so still some HICBC to pay.

Pat38493

Yes it is wise.

Gurk

atush said:

Keep paying into your pension, reducing tax and keeping the CB in full.

If you are still comfortable with the income at present, consider investing the CB into Junior Isas for the kids 
(investments not cash) for the children.  Do you both have isas?  If not open some.  If you have cahs savings of at least 6 months outgoings, put them in investments.

If you have cash and Isas, have your wife investigate AVCs with her techers pension.

Dazed_and_C0nfused said:

If you can afford it then it's extremely tax efficient to sacrifice the £9k.

But don't forget HICBC is based on adjusted net income not just earnings.

So post sacrifice taxable pay of £50,000 plus interest of say £500 and dividends of £500 would be ANI of £51,000 so still some HICBC to pay.

Thank you for your replies. I have a Fidelity stocks and share ISA and a Wealthify 

r6mile

That’s what I do and it makes sense especially with 2+ kids. I have 3 and therefore my marginal rate in the 50-60k range is about 70% once HICBC is taken into account.

However as your salary increases further from 60k there will come a point of diminishing returns. Ie if you are earning 80k then reducing your ANI to 50k might be tax efficient but it’s less of a no brainer, and a big sacrifice to your take home now - especially as kid are not cheap! So not so obvious in my view at that point.

Gurk

Oops posted too soon. I have a Fidelity stocks and share ISA and a Wealthify ISA (both doing incredibly poorly), with a bit of cash too. I presume with the way stocks have been performing, this wouldn't have contributed to any income  but admittedly I didn't know that interest and dividends counted towards the ANI.

I will look into the AVCs thing, thanks. I don't think she knows anything about her pension to be honest. However I guess the pressing issue for me was avoiding the HICBC.

Gurk

r6mile said:

That’s what I do and it makes sense especially with 2+ kids. I have 3 and therefore my marginal rate in the 50-60k range is about 70% once HICBC is taken into account.

However as your salary increases further from 60k there will come a point of diminishing returns. Ie if you are earning 80k then reducing your ANI to 50k might be tax efficient but it’s less of a no brainer, and a big sacrifice to your take home now - especially as kid are not cheap! So not so obvious in my view at that point.

Not entirely sure what marginal rate is or how to work it out, but I agree with the rest of your post. I was discussing with a friend the other day and he was saying as he earns £75k there was no way he was sacrificing £25k, even if he lost a large chunk to the taxman.

Dazed_and_C0nfused

ISA's are tax exempt.

Unwrapped interest and dividend income is taxable and forms part of your ANI even if a 0% tax rate is applied to the income itself.

r6mile

Gurk said:

r6mile said:

That’s what I do and it makes sense especially with 2+ kids. I have 3 and therefore my marginal rate in the 50-60k range is about 70% once HICBC is taken into account.

However as your salary increases further from 60k there will come a point of diminishing returns. Ie if you are earning 80k then reducing your ANI to 50k might be tax efficient but it’s less of a no brainer, and a big sacrifice to your take home now - especially as kid are not cheap! So not so obvious in my view at that point.

Not entirely sure what marginal rate is or how to work it out, but I agree with the rest of your post. I was discussing with a friend the other day and he was saying as he earns £75k there was no way he was sacrificing £25k, even if he lost a large chunk to the taxman.

Marginal rate is what you pay in tax for every £1 you earn. Over 50k, for every £1 earned you pay 40p in income tax. Plus HICBC - 12p for 1 child, 21p for 2 children, 29p for 3, etc. Plus 2p in NI.

So in your case your marginal rate is 63%-ish.

But if you were earning 80k, your marginal rate on anything above 60k would fall to 42% as you are past HICBC.

So paying 30k into your pension would actually cost you 15k in net terms - still good ‘value’ of course but at that point I’d rather have half the money in my 30s than double in my 60s (when I’ll need the money less). Of course others may come to a different conclusion!

MX5huggy

You’re absolutely doing the right thing and keep doing it as long as you can. 

Possibly you are also saving student loan repayments on the Salary Sacrifice as well? The value of this is more difficult to assess because the money you’re not paying is not reducing your balance so increasing interest charged. But still means you would get even less of the income in your pocket.