Tax relief in final year of working

Workerbee999

OH will retire 3 months into next tax year and earn £20k for the year, not drawing any other salary or pension for the rest of that year

When the tax coding is all sorted out he would therefore only pay 20% tax on the amount above the annual personal allowance so about £1,500

Can he still put £16k in a SSIP that would gross up to £20k as 100% earnings, therefore getting £4,000 tax relief even though he will only have actually paid £1,500 in tax?

Thanks

Albermarle

Workerbee999 said:

OH will retire 3 months into next tax year and earn £20k for the year, not drawing any other salary or pension for the rest of that year

When the tax coding is all sorted out he would therefore only pay 20% tax on the amount above the annual personal allowance so about £1,500

Can he still put £16k in a SSIP that would gross up to £20k as 100% earnings, therefore getting £4,000 tax relief even though he will only have actually paid £1,500 in tax?

Thanks

Yes.
How much tax you pay, and how much tax relief you can get are actually unrelated.

Dazed_and_C0nfused

Workerbee999 said:

OH will retire 3 months into next tax year and earn £20k for the year, not drawing any other salary or pension for the rest of that year

When the tax coding is all sorted out he would therefore only pay 20% tax on the amount above the annual personal allowance so about £1,500

Can he still put £16k in a SSIP that would gross up to £20k as 100% earnings, therefore getting £4,000 tax relief even though he will only have actually paid £1,500 in tax?

Thanks

There is no connection whatsoever between the income tax you pay and the basic rate tax relief added to RAS pension contributions.

Lots of non taxpayers stuff £2,880 into a RAS pension each year and get a free £720.

Don't forget to factor in any normal pension contributions though.  The £20k earnings might be after some net pay contributions but if normal contributions are made using the RAS method then they will limit the extra personal contribution that can be made.

Workerbee999

Dazed_and_C0nfused said:

Workerbee999 said:

OH will retire 3 months into next tax year and earn £20k for the year, not drawing any other salary or pension for the rest of that year

When the tax coding is all sorted out he would therefore only pay 20% tax on the amount above the annual personal allowance so about £1,500

Can he still put £16k in a SSIP that would gross up to £20k as 100% earnings, therefore getting £4,000 tax relief even though he will only have actually paid £1,500 in tax?

Thanks

There is no connection whatsoever between the income tax you pay and the basic rate tax relief added to RAS pension contributions.

Lots of non taxpayers stuff £2,880 into a RAS pension each year and get a free £720.

Don't forget to factor in any normal pension contributions though.  The £20k earnings might be after some net pay contributions but if normal contributions are made using the RAS method then they will limit the extra personal contribution that can be made.

That’s good news then.

I had forgotten about normal pension contributions. He’s in a DB through salary sacrifice - so would the relevant total earnings that could go in a SSIP be his taxable earnings after pension contributions (eg £19k if he contributed 5%) , or the PIA that he wouldn’t find out until after the year has finished, but that is employer too?

Dazed_and_C0nfused

Workerbee999 said:

Dazed_and_C0nfused said:

Workerbee999 said:

OH will retire 3 months into next tax year and earn £20k for the year, not drawing any other salary or pension for the rest of that year

When the tax coding is all sorted out he would therefore only pay 20% tax on the amount above the annual personal allowance so about £1,500

Can he still put £16k in a SSIP that would gross up to £20k as 100% earnings, therefore getting £4,000 tax relief even though he will only have actually paid £1,500 in tax?

Thanks

There is no connection whatsoever between the income tax you pay and the basic rate tax relief added to RAS pension contributions.

Lots of non taxpayers stuff £2,880 into a RAS pension each year and get a free £720.

Don't forget to factor in any normal pension contributions though.  The £20k earnings might be after some net pay contributions but if normal contributions are made using the RAS method then they will limit the extra personal contribution that can be made.

That’s good news then.

I had forgotten about normal pension contributions. He’s in a DB through salary sacrifice - so would the relevant total earnings that could go in a SSIP be his taxable earnings after pension contributions (eg £19k if he contributed 5%) , or the PIA that he wouldn’t find out until after the year has finished, but that is employer too?

Salary sacrifice means he isn't contributing anything to a pension, they are employer contributions hence no tax relief gets added.

It is fairly rare I think for DB scheme to use salary sacrifice.  They do sometime for linked DC pots but not usually for the DB element.

But if his taxable employment income after the salary sacrifice is £19k then yes that would be his limiting amount.

Workerbee999

Dazed_and_C0nfused said:

Workerbee999 said:

Dazed_and_C0nfused said:

Workerbee999 said:

OH will retire 3 months into next tax year and earn £20k for the year, not drawing any other salary or pension for the rest of that year

When the tax coding is all sorted out he would therefore only pay 20% tax on the amount above the annual personal allowance so about £1,500

Can he still put £16k in a SSIP that would gross up to £20k as 100% earnings, therefore getting £4,000 tax relief even though he will only have actually paid £1,500 in tax?

Thanks

There is no connection whatsoever between the income tax you pay and the basic rate tax relief added to RAS pension contributions.

Lots of non taxpayers stuff £2,880 into a RAS pension each year and get a free £720.

Don't forget to factor in any normal pension contributions though.  The £20k earnings might be after some net pay contributions but if normal contributions are made using the RAS method then they will limit the extra personal contribution that can be made.

That’s good news then.

I had forgotten about normal pension contributions. He’s in a DB through salary sacrifice - so would the relevant total earnings that could go in a SSIP be his taxable earnings after pension contributions (eg £19k if he contributed 5%) , or the PIA that he wouldn’t find out until after the year has finished, but that is employer too?

Salary sacrifice means he isn't contributing anything to a pension, they are employer contributions hence no tax relief gets added.

It is fairly rare I think for DB scheme to use salary sacrifice.  They do sometime for linked DC pots but not usually for the DB element.

But if his taxable employment income after the salary sacrifice is £19k then yes that would be his limiting amount.

Yes, definitely salary sacrifice, it works out that way on his payslip and confirms it in the scheme booklet. 

Seems to make sense then to aim to pay the whole lot into his SSIP - with the personal allowance being 12.5k, he can put in £12.5k that he has not paid tax on,  and gain £3.1k tax relief to gross it up to  £15.6k Then take that extra £3.1k out the following year when he is 55 and only effectively pay 15% tax on it. So about £2.6k extra benefit for nothing as well as a small amount on the difference between £19k and £15.6k. I think…..

Could also look at AVCs and take out tax free with the DB but then he has to wait till he is 63 and there are some limit’s around AVCs, so not as flexible.

Workerbee999

Can anyone also tell me what that means for how much interest can be earned before paying tax in that year? 

100% of earnings would be offset by SSIP contributions ( but not salsac so earnings would still show as income on HMRC records) so can the personal allowance then cover interest income? And then the £5,000 starter savings amount as well (what are the rules around that being available?) and then the £1,000 personal savings allowance - or maybe only some of this?

seems like it could make sense to lock away some 12 month bonds where the interest would all be paid in next financial year, then switch to monthly interest in the year to almost double up.

The following year OHs pension would start so he would then be a 20% tax payer.

Dazed_and_C0nfused

Workerbee999 said:

Can anyone also tell me what that means for how much interest can be earned before paying tax in that year? 

100% of earnings would be offset by SSIP contributions ( but not salsac so earnings would still show as income on HMRC records) so can the personal allowance then cover interest income? And then the £5,000 starter savings amount as well (what are the rules around that being available?) and then the £1,000 personal savings allowance - or maybe only some of this?

seems like it could make sense to lock away some 12 month bonds where the interest would all be paid in next financial year, then switch to monthly interest in the year to almost double up.

The following year OHs pension would start so he would then be a 20% tax payer.

You've misunderstood how it works.  Nothing is changing the fact they are a basic rate payer.

RAS contributions never reduce your taxable income so in the example above with taxable earnings of £19k all of the Personal Allowance and at least £5,000 of the basic rate band has been used by the earnings.

So no savings starter rate band is available.

But the full £1,000 savings nil rate band is available (income taxed at 0%).

That would only change if they strayed into higher rate territory.

Workerbee999

Ah ok, that’s a shame. Would it be different if he salsac to min wage instead? But then he’d miss out on the 20% tax relief he would get putting it into a SSIP (12,750 grossed up when never paying tax on it in the first place) , but would save NI. That benefit might be less though, than the benefit of extra allowance for untaxed interest.

Dazed_and_C0nfused

Workerbee999 said:

Ah ok, that’s a shame. Would it be different if he salsac to min wage instead? But then he’d miss out on the 20% tax relief he would get putting it into a SSIP (12,750 grossed up when never paying tax on it in the first place) , but would save NI. That benefit might be less though, than the benefit of extra allowance for untaxed interest.

You cannot sacrifice below NMW but other than that it's usually better for most people.

You don't get any pension tax relief added to the contribution but, depending on the exact circumstances, can avoid paying 20% tax and 12% NI on the amount sacrificed.

So you may be able to find a sweet spot where a mix of sacrifice and RAS contributions give the best outcome overall.

For most people having taxable earnings of £17,570 or more will mean no savings starter rate band is available.

Workerbee999

Thanks, I’ll have to do some modelling! When does the starter rate apply, is it the next £5k straight after the £12,570? So maybe sacrifice down to £12,570, put 12,750 into a SSIP to get the extra 20% tax relief, then be able to get the £5k starter savings rate as well as the £1,000

If only the 25% tax free amount is taken out of a SSIP in tax tax year, does that mean no earned income so 17,570 could be earned in interest? ( not that it would be that much).