Please help: pension calculations (tax relief etc)

WittyUserName

Not proud to say I’m not very financially literate and not good at maths, so need help thinking this through and working it out. Thanks in advance:

- pension pot is not where I’d like it to be at age 45, and I’m not at all tax efficient in the way I manage my affairs 

- My pensionable salary is £90k pa
- Allowance and a consistent annual bonus push this up to £121k 
- Personal tax allowance is eroded I think because of the allowance and bonus (?)
- currently contribute 5% to a DC pension via salary sacrifice 
- employer contributes 15% 

Questions about maxing out my pension contributions:

- am I correct that the current allowance of £60k for tax relief includes my employer’s contribution?

- what % of the £90k should I contribute over all (including my current 5%) to drop me down to the basic tax rate?

- would maxing out like this restore my personal allowance to £12,570? Agreed the erosion isn’t much but still want to plug gaps 

- what would my net income be if I max out and drop down to the basic rate? 

- Am I going about this the wrong way? 

I basically want to:
- boost my pension
- maximise all the tax relief I can get 
- restore my personal allowance 
- but not earn minimum wage - have a mortgage to overpay! 

Ps: thanks to reading posts here I’ve taken steps to switch from a severely underperforming fund - post for another day! But thank you to all who share their experience and wisdom. 

Pat38493

You are about 3 or 4 years ahead of where I had the above realizations.

First - you are correct about the personal allowance issue - all the taxable income you are earning between £100K and £120K is effectively taxed at 60% because they are removing your personal allowance.  At the very least, you should increase your pension contributions to get your taxable earnings below £100K.

The £60K does include employer contributions.  However there is also a carry forward allowance so that once you have used up the £60K, you are allowed to also use any unused allowance from the prior 3 tax years, so at least for 3 years you could put in a lot more.

Also to calculate this you need to know whether your employer shares any of the employer NI benefits of salary sacrifice with you - this is good if they do but it's also part of the number.

- The % you need to contribute would be the % to drop you down to below about £50K of taxable income.  If you are getting that bonus every year, you are going to be looking at nearly 80% but you would need to use a salary checker website and a spreadsheet to figure it out exactly - are your pension % only based on the £90K?  Does your employer allow one off additions?  

- If you put it that high, you might run into an issue that with salary sacrifice pensions, you cannot reduce your salary below the minimum wage in any pay period.  Needs a bit more maths I'm afraid.

Getting your taxable income below 100K will restore your personal allowance (apart from any other taxable benefits that you have).

First step is - 
- Change your contributions to get your taxable income below 100K (this will also have the side benefit that after you do this a couple of times you will no longer need to complete a tax return).

- Figure out how much net income you actually need to live - using this you can then get into the calculations.

You are thinking on the right lines though because you are leaving an enormous amount of tax relief on the table there (which I was also doing a few years ago as well until I realised the errors of my ways!).

xylophone

currently contribute 5% to a DC pension via salary sacrifice 
- employer contributes 15% 

 So the whole contribution is an employer's contribution?

See
https://www.gov.uk/tax-on-your-private-pension/annual-allowance#:~:text=Your annual allowance applies to,(for example, your employer)

Are you permitted to increase the salary sacrifice?

QrizB

WittyUserName said:

- what would my net income be if I max out and drop down to the basic rate?

From what you say, this year and next you could (at least in theory) salsac all the way down to minimum wage, around £20k pa gross, £18k net, £1500pm.

Could you live on that?

Secret2ndAccount

You earn 121k, but 5% of it never gets to you because it goes to your pension. So that's 115k.  To be a basic rate taxpayer you need to get that down to 50k. So increase your salary sacrifice by 65k.
That will mean you are putting in 71k plus 12k from your employer, so 83k. That's considerably more than the 60k annual allowance, but you can use carry forward. It seems like you might have maybe 60k of unused allowance from the last three years. So for at least the next couple of years, you can achieve what you wish. Roughly, you want to go from 5% to 59% salsac.

Pat38493

Secret2ndAccount said:

You earn 121k, but 5% of it never gets to you because it goes to your pension. So that's 115k.  To be a basic rate taxpayer you need to get that down to 50k. So increase your salary sacrifice by 65k.
That will mean you are putting in 71k plus 12k from your employer, so 83k. That's considerably more than the 60k annual allowance, but you can use carry forward. It seems like you might have maybe 60k of unused allowance from the last three years. So for at least the next couple of years, you can achieve what you wish. Roughly, you want to go from 5% to 59% salsac.

With most employers, the salsac % that you specify is based on the basic salary rather than the one with bonus, so it's more like 80% if that's the case?

Also - 80% might take OP below minimum wage on the basic salary if the bonus is only awarded annually so it might have to be done by maximising salsac and then a SIPP contribution separately.

WittyUserName

Pat38493 said:

You are about 3 or 4 years ahead of where I had the above realizations.

First - you are correct about the personal allowance issue - all the taxable income you are earning between £100K and Ki£120K is effectively taxed at 60% because they are removing your personal allowance.  Ouch!! 

At the very least, you should increase your pension contributions to get your taxable earnings below £100K. 

The £60K does include employer contributions.  However there is also a carry forward allowance so that once you have used up the £60K, you are allowed to also use any unused allowance from the prior 3 tax years, so at least for 3 years you could put in a lot more. Thanks for this info I’d seen this in relation to ISA’s but didn’t know it applied to pensions as well 

Also to calculate this you need to know whether your employer shares any of the employer NI benefits of salary sacrifice with you - this is good if they do but it's also part of the number. Do you know how I can find this out eg would it be detailed on my payslip? 

- The % you need to contribute would be the % to drop you down to below about £50K of taxable income.  If you are getting that bonus every year, you are going to be looking at nearly 80% but you would need to use a salary checker website and a spreadsheet to figure it out exactly - are your pension % only based on the £90K?  Does your employer allow one off additions?  We used to be able to contribute part or all of our bonus to our pensions (which I foolishly never did) but there hasn’t been an email offering this for the past couple of years 

- If you put it that high, you might run into an issue that with salary sacrifice pensions, you cannot reduce your salary below the minimum wage in any pay period.  Needs a bit more maths I'm afraid.

Getting your taxable income below 100K will restore your personal allowance (apart from any other taxable benefits that you have). 

First step is - 
- Change your contributions to get your taxable income below 100K (this will also have the side benefit that after you do this a couple of times you will no longer need to complete a tax return).

- Figure out how much net income you actually need to live - using this you can then get into the calculations. 

You are thinking on the right lines though because you are leaving an enormous amount of tax relief on the table there (which I was also doing a few years ago as well until I realised the errors of my ways!).

Thanks very much for replying, I’ve responded in bold 

WittyUserName

xylophone said:

currently contribute 5% to a DC pension via salary sacrifice 
- employer contributes 15% 

 So the whole contribution is an employer's contribution? Sorry I don’t understand, of the total 20% contribution, 5% comes from my salary ie from me. Or have I misunderstood your question?

See
https://www.gov.uk/tax-on-your-private-pension/annual-allowance#:~:text=Your annual allowance applies to,(for example, your employer)

Are you permitted to increase the salary sacrifice? Yes I can increase it, but thanks for asking this question because I’ve just realised I don’t know if there are limits to how much I can increase it to - other than the rule about not dropping below minimum wage, can a company restrict salsac contributions? 

Thanks for replying I’ve responded in bold 

WittyUserName

QrizB said:

WittyUserName said:

- what would my net income be if I max out and drop down to the basic rate?

From what you say, this year and next you could (at least in theory) salsac all the way down to minimum wage, around £20k pa gross, £18k net, £1500pm.

Could you live on that? Sadly no, not with my mortgage millstone around my neck! If we were mortgage free around £2k would be do-able (ish) 

Thanks for replying, I’ve responded in bold 

WittyUserName

Secret2ndAccount said:

You earn 121k, but 5% of it never gets to you because it goes to your pension. It’s 5% of £90k (my basic pensionable salary) that goes to my pension 

So that's 115k.  To be a basic rate taxpayer you need to get that down to 50k. So increase your salary sacrifice by 65k. So for me this would mean contributing a total of £40k
That will mean you are putting in 71k plus 12k from your employer, so 83k. That's considerably more than the 60k annual allowance, but you can use carry forward. It seems like you might have maybe 60k of unused allowance from the last three years. Yes I do thankfully. Do I need to actively
do anything to trigger the carry forward (apply, make a declaration etc) or the system figures it out in the back end? 

So for at least the next couple of years, you can achieve what you wish. Roughly, you want to go from 5% to 59% salsac.

Thanks for replying I’ve responded in bold 

WittyUserName

Pat38493 said:

Secret2ndAccount said:

You earn 121k, but 5% of it never gets to you because it goes to your pension. So that's 115k.  To be a basic rate taxpayer you need to get that down to 50k. So increase your salary sacrifice by 65k.
That will mean you are putting in 71k plus 12k from your employer, so 83k. That's considerably more than the 60k annual allowance, but you can use carry forward. It seems like you might have maybe 60k of unused allowance from the last three years. So for at least the next couple of years, you can achieve what you wish. Roughly, you want to go from 5% to 59% salsac.

With most employers, the salsac % that you specify is based on the basic salary rather than the one with bonus, That’s correct in my case. My allowance and bonus are out of scope for salsac 

so it's more like 80% if that's the case?

Also - 80% might take OP below minimum wage on the basic salary if the bonus is only awarded annually so it might have to be done by maximising salsac and then a SIPP contribution separately. Ok looks like I’ll
be busy this weekend, educating myself on SIPPs…

For some reason I can’t post my responses without typing a comment at the bottom, so once again: Thank you for replying, I’ve responded in bold!