Sudden salary increase from 40k to 60k - increase pension contributions

eastcorkram

[Deleted User] said:

No, no other income. 
Erm, I suppose my taxable income will be 60k less my personal allowance?

Surely to have 60k on your next P60, you'd have to have been promoted before last April. 

[Deleted User]

r6mile said:

Assuming no other income, Scottish 42% higher rate tax band starts at £43,633 so if your salary was £60k exactly you’d want to be putting just over £16k into your pension, so around 27%. The net cost of this to you would be £9.3k, less if your pension is via salary sacrifice.

Whether you do it via your SIPP or your works pension is up to you, if the latter has low fees then that makes sense (especially so if via salary sacrifice). Remember that if your pension is relief at source you will have to let HMRC how much you are putting in so they can refund you the higher rate relief.

Yes, see what I was trying to work out is whether I am to invest the bit between 43k and 60k ie 17k and THEN get the tax back.  Or if the 17k includes the tax rebate. So you are saying it's the latter. 

BC&E is fairly low charges I think but I do prefer Vanguard as a whole, it has more choice of funds and I like them as a company. 

Dazed_and_C0nfused

[Deleted User] said:

r6mile said:

Assuming no other income, Scottish 42% higher rate tax band starts at £43,633 so if your salary was £60k exactly you’d want to be putting just over £16k into your pension, so around 27%. The net cost of this to you would be £9.3k, less if your pension is via salary sacrifice.

Whether you do it via your SIPP or your works pension is up to you, if the latter has low fees then that makes sense (especially so if via salary sacrifice). Remember that if your pension is relief at source you will have to let HMRC how much you are putting in so they can refund you the higher rate relief.

Yes, see what I was trying to work out is whether I am to invest the bit between 43k and 60k ie 17k and THEN get the tax back.  Or if the 17k includes the tax rebate. So you are saying it's the latter. 

BC&E is fairly low charges I think but I do prefer Vanguard as a whole, it has more choice of funds and I like them as a company. 

You've lost me as to why you will earn £60k?

If you have been earning £40k and are now being promoted and will now earn £60k surely your current tax year earnings will be somewhat less than £60k.

NB.  You only ever get basic rate tax relief added to RAS (relief at source) pension contributions.  Any additional relief due benefits you, it doesn't get added to your pension fund.

Have you been claiming intermediate relief on your existing contributions?

[Deleted User]

Oh I see.  Right yes so as of today, my salary increases from 40k to 60k per annum.  So by the end of tax year 23/24 I will not have earned 60k. Half of the tax year I will have been on 40k and half on 60k.  So my earnings will roughly be 50k. So that will reduce the amount of pension contributions on which I can get higher rate tax relief 

[Deleted User]

Yes, BC&E have been automatically adding basic or intermediate rate tax relief to my pension every month - this is what it looked like: 

Mandatory from me	4%	109.20
Tax Refund	1%	25.64
Mandatory from firm	3	% 81.90
TOTAL	8%	216.74

[Deleted User]

NB.  You only ever get basic rate tax relief added to RAS (relief at source) pension contributions.  Any additional relief due benefits you, it doesn't get added to your pension fund.

I didn't know this, thanks. I though that the Government would add into your pension £40 for every £60 you invested of the part of your salary that is higher rate. 

When you say "benefits you" - what does that mean?  

Dazed_and_C0nfused

[Deleted User] said:

Yes, BC&E have been automatically adding basic or intermediate rate tax relief to my pension every month - this is what it looked like: 

Mandatory from me	4%	109.20
Tax Refund	1%	25.64
Mandatory from firm	3	% 81.90
TOTAL	8%	216.74

Those figures don't make sense but irrespective of that you would only ever get basic rate tax relief added to the pension.

Anything above that would have to be claimed from HMRC.  Although you may not feel it's worthwhile for the period you were just paying intermediate rate tax.

QrizB

[Deleted User] said:

When you say "benefits you" - what does that mean?  

You pay less tax, so it ends up in your pocket not in the pension.

[Deleted User] said:

So that will reduce the amount of pension contributions on which I can get higher rate tax relief 

You'll still get basic rate tax relief on anything else you pay into a relief-at-source pension, up to (this tax year) £50k gross.

Dazed_and_C0nfused

[Deleted User] said:

NB.  You only ever get basic rate tax relief added to RAS (relief at source) pension contributions.  Any additional relief due benefits you, it doesn't get added to your pension fund.

I didn't know this, thanks. I though that the Government would add into your pension £40 for every £60 you invested of the part of your salary that is higher rate. 

When you say "benefits you" - what does that mean?  

You see the benefit of any additional tax relief, it never gets added to your pension fund.

Say for example you contribute £80 net.  The pension company will add £20 in basic rate tax relief to make a pension fund of £100.

If you are due higher rate tax relief (or intermediate rate relief) then that relief benefits you, either as a refund (to you) or by paying less PAYE tax during the year.

af1963

Pay in £80, tax relief tops it up to £100.  Your basic rate allowance is also increased by £100, which saves you from being taxed at 42% on an extra £100. You pay 21% instead on that chunk of money where you would otherwise have paid 42%. So your employer deducts less tax, or you claim back any overpayment.

Doesn't matter whether it goes to employer pension or to SIPP.  If your employer offered salary sacrifice that would probably be better, but your examples look like that's not how they do it.

Overall - you end up having paid tax at 21% on the extra cash, but got most of it back as a 20% tax relief payment in the pension. You can also get (via your tax return, or by contacting HMRC) a refund of the extra 1% charged in Scotland.