Net adjusted income crept above 105k. Pension question

MetaPhysical

Hello.
My first post to MSE after being a very long-time watcher.  I wish health, wealth and happiness to all.

I forecast that my net adjusted income for this year may be over the 100k mark this year due to some very big "bluebird" bonuses that won't get repeated next year and I will fall into the hated 60% tax trap.  I anticipated this a few months ago and started to max my pension payments each month from my salary sacrifice scheme as high as I possibly can (without dropping below the minimum wage)  and then use the bonus to make up the monthly shortfall due to these pension contributions.  I expect that I would have paid about 46k into my pension this year, which of course my own financial contribution would only be about 30k due to tax relief and employer contribution.

Despite that, I think I will still be at about 105k this year as my NAI unless I can do something.

I read that by making a cash pension contribution from savings (in addition to the salary sacrifice) this will bring down the NAI because the 40% tax relief "reduces" your NAI back to below the 100k threshold if you contribute enough.  I do not understand this, and hence my question please?  Does this make sense?

Many thanks.

Dazed_and_C0nfused

If you add a qualifying contribution to a RAS (relief at source) scheme there are three key benefits (for your particular situation).

1.  Your net contribution has 25% added by the pension company (equivalent to 20% of the gross contribution).

2.  The gross contribution increases your basic rate band.  So more income is taxed at 20% and less at 40%.

3.  The gross contribution reduces your adjusted net income.  Which can help preserve your Personal Allowance.

So say you pay £2,000.  This ends up as a pension fund of £2,500.  And you basic rate band increases from £37,700 to £40,200.  And your adjusted net income is reduced by £2,500.

MetaPhysical

Hi Dazed and Confused,
Thanks so much for your reply.
I have a degree in physics and applied maths and a masters in atomic chemistry, so I am well acquainted with numbers,  but I can't get my head around this.  Why should it be that my basic rate band increases by the contribution and the tax relief? I get it that we get tax relief on the cash contribution (20% and then an additional 20% on my tax return).  But why should that have any influence on the tax bands themselves??

What a crazy tax system we have.  This tapering 60% rate is grotesque and it disincentivises working professional people.  There is something objectionable paying 60% to the government - actually 62.5% - in tax for working hard.

Kind regards.

MetaPhysical

Hmmm, I think I am just looking into this too much.  Capital payments into a pension are just tax deductible.  Period.  I'm not allowed to post links yet but if you google an article called "The personal allowance tax trap" by Craig Muir, it explains the situation with examples.

Dazed_and_C0nfused

RAS contributions aren't "tax deductible" in the normal sense.

They are definitely beneficial but they do not reduce your taxable income.

MetaPhysical

Yes indeed, I used the incorrect terminology.  The capital payment as you mentioned earlier lowers one's net adjusted income.  

MetaPhysical

This is the link I was referring to for people's reference searching this thread in the future.
The personal allowance tax trap: 60% tax? Isn’t the top rate 45%? - Royal London for advisers