Please help: pension calculations (tax relief etc)

Pat38493

WittyUserName said:

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 

Best thing is probably to discuss it with your payroll / HR team to ask them how much if any of the employer NI savings from Salsac are shared with employees (and if none, why!).

You will usually not see this specifically mentioned on the payslip, but if you start out by making a significant increase in contributions to say 20% or so, you will see what will be the impact on the pension contribution is any sharing would show up in the notional employer part of the contribution (although technically if you are on salsac your entire pension contribution is done by the employer).

There is some fancy maths you can do to figure it out if you have all the data from the payslip but i don't have time to figure it out right now - much better just to ask them.  Once you have the % there is a formula you could use to estimate it - it might not be 100% accurate but it's close enough.

To give a rough idea, I am currently putting 62% of my salary into salsac (temporarily this high!) - the notional employer contribution is £999.  If they were not sharing 50% of the NI benefit it would be £599.

Edit:  15% is quite high for an employer contribution generally, so they might argue that they are already being generous there anyway.

Pat38493

WittyUserName said:

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 

You don't need to do anything to trigger carry forward - you are responsible for tracking it yourself so you need to find out exactly what was put into hte pension in the prior 3 tax years and make a spreadsheet.  If you exceed the allowance, you are responsible for reporting it and paying any extra tax due (but probably HMRC will catch up with you and fine you at some future date if you don't do it!).

Pat38493

Also - if you are really only living on equivalent of 50K salary, this might imply you have a lot of savings that you could then put into a SIPP.  Either that or you are going to take a massive hit in your spending.

However note also that in any one tax year you cannot put more than your total earnings into pensions (this is a separate limit and does not have carry forward).

NoMore

WittyUserName said:

 

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 

It does not apply to ISA's in any way at all, so I've no idea what you mean when you say you've seen it in relation to ISA.

xylophone

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 below.

You have agreed to sacrifice a percentage of your salary -  in effect, there is no personal contribution - the whole amount paid into the pension is from the employer?

https://getpenfold.com/employer-tools/salary-sacrifice-pensions-explained

Albermarle

WittyUserName said:

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! 

There is a minimum number of letters you have to write in the comments, otherwise it will not post.
Now referring to your last comment in bold.
There are two distinct types of pension.
Defined Benefit ( DB) also referred to as Final Salary schemes. You can ignore all references to these.
Defined Contribution ( DC) sometimes referred to as Money Purchase schemes - these are what you need to learn about. You may seen them referred to as workplace pensions, auto enrolment pensions, SIPP's, personal pensions etc but legally and tax wise they all are all DC pensions and have to follow the same rules. You simply build up a pot of money in them via your contributions ( and the tax relief) and your employer contributions . The money is normally invested in the financial markets to hopefully achieve long term growth. You will have a choice of investments but usually in workplace schemes most are in a default investment fund, as they have declined to actually choose anything specific.
Some more detailed info here.
Pensions: Everything you need to know for retirement - MSE (moneysavingexpert.com)
Pensions and retirement | Help with pensions and retirement | MoneyHelper

WittyUserName

xylophone said:

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 below.

You have agreed to sacrifice a percentage of your salary -  in effect, there is no personal contribution - the whole amount paid into the pension is from the employer?

https://getpenfold.com/employer-tools/salary-sacrifice-pensions-explained

I see what you mean. Yes in effect the employer pays it all, though what I meant by “5% comes from me” is that it’s from money I’ve earned 

WittyUserName

Thank you to everyone who’s replied, it’s much appreciated