DB pension and additional contributions

Shinynewpenny

Morning everyone 

Long time lurker here. I’ve recently had some well received news of a pay rise and a still on cloud 9/trying to get my head around it all!!

It is a significant jump so I’m in new territory now of high income child benefit charge.

I’ve done my sums, but would really appreciate a second pair of eyes as tax relief is throwing me a little.

Salary is now £62k
8.5% DB contributions £5270

Should I therefore make voluntary contributions of £6631 or should it be £4736 as tax relief counts towards the gross amount?

Thanks for any advice here - my head is fried (in a good way!!) 

Dazed_and_C0nfused

It all depends on the method used to make the contributions.

Tax isn't based on salary it is taxable income which counts.

And for HICBC it's adjusted net income.

Are the 8.5% DB contributions paid using net pay i.e. your P60 would show £56,730 and no pension tax relief is added to the contribution?

What method will be used for the voluntary contributions?

[Deleted User]

If you are making contributions to that scheme you need to increase them to £6631 - you will obtain the additional relief through your salary. 

If making a contribution to a separate private pension it would need to be £5304. Thus would be grossed up to £6630 by the pension company. 

Shinynewpenny

Thank you - appreciate the replies.

The 8.5% is a pre tax deduction into LGPS so does reduce my taxable pay.

I need to ask work if AVC would be an option, as am I right in thinking there would be NI savings from both sides?

Wouldn’t be against opening a SIPP as feel I would like the control of paying amounts myself rather than going through a HR dept each time.

Still unsure of where the tax relief fits in and how is contributes (or doesn’t) to the taxable pay.

Thanks again

Dazed_and_C0nfused

Contributions to a SIPP don't have any impact on your taxable income.

But they do have three other benefits in your situation (not that they are necessarily better than paying direct to LGPS).

1.  Basic rate tax relief is added to your (net) contribution so say £4,000 from you becomes £5,000 in the SIPP.

2.  Your basic rate band is increased by the gross contribution.

3.  Your adjusted net income, used to calculate HICBC, is reduced by the gross contribution.

[Deleted User]

In the second option the amount of £5304 which would be contributed to a SIPP would be grossed up to £6630. This also has the effect on increasing your basic rate band by £6630 to £56900 - you will now pay basic rate tax up to this amount. 

You would need to inform HMRC of your contribution in order to claim the addition 20% relief.

Shinynewpenny

Thank you! So if I went down the SIPP route (I will speak to my employer first to discuss AVC to LGPS or similar), I could add gross 6630 (my amount + tax relief) and then complete a self assessment form to show that my adjusted net income is below the HICBC threshold?

it really helps to talk this through, so thank you for this!!

Dazed_and_C0nfused

Shinynewpenny said:

Thank you! So if I went down the SIPP route (I will speak to my employer first to discuss AVC to LGPS or similar), I could add gross 6630 (my amount + tax relief) and then complete a self assessment form to show that my adjusted net income is below the HICBC threshold?

it really helps to talk this through, so thank you for this!!

Based on what you have posted you would only need to complete a tax return if you were liable to HICBC.

If you aren't then the higher rate tax relief on the RAS contributions can be dealt with providing HMRC details of the contributions (net amount, tax relief and gross for each tax year you make such contributions).

Shinynewpenny

Thank you! I am grasping this, but think I’ll need to read the thread through a few times, as this is new territory for me.

Would be interested to know what others who are in a similar situation do, or what they would do if they were me.

I’d previously been well under any 50k band and had been putting 450 per month away into a S&S ISA - I’m going to stop that now but just want to make sure I’m making the right moves (I’m 35)

Dazed_and_C0nfused

Extra pension contributions are much more tax efficient on your new income than a S&S ISA (certainly when it applies to a full tax year, the current year will need some calculations to see what your income will be split old and new earnings).

SIPP adds flexibility but you may get that with LGPS depending on exactly what option you choose - I believe there are several when it comes to paying extra above the basic.

Shinynewpenny

Thank you- I’ll definitely ask for some time to look through with them. Good problem to have- have found out pay rise will be back dated which is of course wonderful, but will need to crunch some of the numbers carefully for this tax year.

A good problem to have and really grateful for the replies here: what a lovely community.