Should I pay AVC to lower my taxable income?

aldino2015

England, age 37. No children. Salary is £57k (will be £60k soon). I have a final salary pension, so pay 5% every pay (4 weekly).

My job involves overtime, my 2023 P60 showed £71k total income.

As you can probably tell, any overtime I do, I only get around 55% of it in my pay/bank account, so ~45% of it is straight to the tax man which always sucks.

I've used online tax calculators and it looks like if my taxable income is MAX £53k then I will only pay the 20% tax rate. Is AVC the best/only way to do this? How would it work (the amount of AVC I pay) if my income fluctuates every month depending on the amount of OT I do? 

I know I would take a hit on my take home pay, which to be honest I need now, instead of in 20-30 years time, but I just hate giving away so much of it to the government. Any other options or advise welcome, thanks!

Dazed_and_C0nfused

A good starting point is to understand the method you will use to get extra money into the pension as although the end result is generally the same the different methods work slightly differently.

Will they be net pay (reduce taxable income) or relief at source (don't reduce taxable income but get 25% added by the pension company)?

I've used online tax calculators and it looks like if my taxable income is MAX £53k

How is the £53k made up as £53k of earnings would usually put you into the higher rate bracket.

aldino2015

Dazed_and_C0nfused said:

A good starting point is to understand the method you will use to get extra money into the pension as although the end result is generally the same the different methods work slightly differently.

Will they be net pay (reduce taxable income) or relief at source (don't reduce taxable income but get 25% added by the pension company)?

I've used online tax calculators and it looks like if my taxable income is MAX £53k

How is the £53k made up as £53k of earnings would usually put you into the higher rate bracket.

I think your brackets are the wrong way round? It's at source - the AVCs would be deducted from my pay before tax is calculated so it does reduce the taxable income. After looking into it in more detail just now, the total I can contribute to my pension fund is 15% of gross earnings, so that leaves 10% maximum for AVCs.

As for the £53k, I just put in the figures into LTT - Tax code 1263L, 5% pension, and only when I put the salary above £53k does it show any 40% deduction.

Thanks

Dazed_and_C0nfused

aldino2015 said:

Dazed_and_C0nfused said:

A good starting point is to understand the method you will use to get extra money into the pension as although the end result is generally the same the different methods work slightly differently.

Will they be net pay (reduce taxable income) or relief at source (don't reduce taxable income but get 25% added by the pension company)?

I've used online tax calculators and it looks like if my taxable income is MAX £53k

How is the £53k made up as £53k of earnings would usually put you into the higher rate bracket.

I think your brackets are the wrong way round? It's at source - the AVCs would be deducted from my pay before tax is calculated so it does reduce the taxable income. After looking into it in more detail just now, the total I can contribute to my pension fund is 15% of gross earnings, so that leaves 10% maximum for AVCs.

As for the £53k, I just put in the figures into LTT - Tax code 1263L, 5% pension, and only when I put the salary above £53k does it show any 40% deduction.

Thanks

I think you are getting confused.

In your original post you said your taxable income was £53k.  

Are you now saying you earn (irrelevant for tax purposes) £53k but make 5% pension contributions using the net pay method?  So taxable income (relevant for tax purposes) would be £50,350 and still falling within the higher rate tax band.

Even with £60 expenses (reason for code 1263L?) you are still in the higher rate band.  Albeit only just.

Unfortunately pension terminology is a bit confusing.  Net pay contributions reduce your taxable income, essentially you ignore them as your P60 will have factored them in so including them in your calculations is just overcomplicating things.

Relief at source contributions don't reduce taxable income.  But they do get 25% added by the pension company and also increase the basic rate band.  So £1,000 from you would become £1,250 in the pension fund.  And mean your basic rate band was £38,950, not £37,700.

aldino2015

Dazed_and_C0nfused said:

aldino2015 said:

Dazed_and_C0nfused said:

A good starting point is to understand the method you will use to get extra money into the pension as although the end result is generally the same the different methods work slightly differently.

Will they be net pay (reduce taxable income) or relief at source (don't reduce taxable income but get 25% added by the pension company)?

I've used online tax calculators and it looks like if my taxable income is MAX £53k

How is the £53k made up as £53k of earnings would usually put you into the higher rate bracket.

I think your brackets are the wrong way round? It's at source - the AVCs would be deducted from my pay before tax is calculated so it does reduce the taxable income. After looking into it in more detail just now, the total I can contribute to my pension fund is 15% of gross earnings, so that leaves 10% maximum for AVCs.

As for the £53k, I just put in the figures into LTT - Tax code 1263L, 5% pension, and only when I put the salary above £53k does it show any 40% deduction.

Thanks

I think you are getting confused.

In your original post you said your taxable income was £53k.  

Are you now saying you earn (irrelevant for tax purposes) £53k but make 5% pension contributions using the net pay method?  So taxable income (relevant for tax purposes) would be £50,350 and still falling within the higher rate tax band.

Even with £60 expenses (reason for code 1263L?) you are still in the higher rate band.  Albeit only just.

Unfortunately pension terminology is a bit confusing.  Net pay contributions reduce your taxable income, essentially you ignore them as your P60 will have factored them in so including them in your calculations is just overcomplicating things.

Relief at source contributions don't reduce taxable income.  But they do get 25% added by the pension company and also increase the basic rate band.  So £1,000 from you would become £1,250 in the pension fund.  And mean your basic rate band was £38,950, not £37,700.

Ok yes definitely some confusion then.

My mistake about the £53k, that was just an example. I should have said according to the LTT calculator, if my gross pay is £53k (with 5% pension contribution) then I would only pay 20% tax, hence my thinking that's the figure I need to aim to get down to.

As per OP, my base salary is £57k, my 2023 P60 though shows £71k total pay including the overtime. Going forward I can expect around ~£10k extra per annum via OT over my base salary.

You are right about my defined benefit pension - it is not relief at source but net pay, my mistake.

I guess really my only option is to max out the AVC at 10%? Just wanted to make sure it's cost effective, as you can tell I'm not too clued up on pensions etc!

Thanks