Higher Tax Rate & Upping Pension Contributions

namooo

I am due to start a new role where my salary pushes me a little into the higher rate 40% tax band. 
Am I right in thinking it would be more efficient to increase my pension contributions to reduce the amount of salary that falls over the threshold? Can anyone point me to any calculators to find out what the best amount is to increase the contributions by to avoid this I what I need to be working out as it gets complicated with a car allowance (taken as cash) and BIK health insurance etc which I think have different rules on employer contributions and which skew the figures.

Green_hopeful

No idea on a calculator but I wish I had chucked any money in the 40 percent band into my pension, especially leading up to 55 when you can get it back out if you need to. I was madly trying to save for my retirement but I could have got lots of tax back if I had put more in. I have got tax back on my contributions this year but I could have got previous years as well. 

Marcon

namooo said:

I am due to start a new role where my salary pushes me a little into the higher rate 40% tax band. 
Am I right in thinking it would be more efficient to increase my pension contributions to reduce the amount of salary that falls over the threshold? Can anyone point me to any calculators to find out what the best amount is to increase the contributions by to avoid this I what I need to be working out as it gets complicated with a car allowance (taken as cash) and BIK health insurance etc which I think have different rules on employer contributions and which skew the figures.

Does your employer permit salary sacrifice? If so, you'll get an NI saving as well as taking yourself below the higher rate tax threshold.

Archerychick

Unsure about a calculator, but there were some very helpful people on this form to me early this year for this very reason. Unsure on your personal circumstances but for me, with no debt other than a small low interest rate mortgage, no big life spending coming up, increasing my pension contributions to keep me under the 40% band was the most tax efficient way for me to save for the future. 

tigerspill

Marcon said:

namooo said:

I am due to start a new role where my salary pushes me a little into the higher rate 40% tax band. 
Am I right in thinking it would be more efficient to increase my pension contributions to reduce the amount of salary that falls over the threshold? Can anyone point me to any calculators to find out what the best amount is to increase the contributions by to avoid this I what I need to be working out as it gets complicated with a car allowance (taken as cash) and BIK health insurance etc which I think have different rules on employer contributions and which skew the figures.

Does your employer permit salary sacrifice? If so, you'll get an NI saving as well as taking yourself below the higher rate tax threshold.

Surely as even a base rate tax payer it is still massively advantaged to pay into pension as the NI relief is 12%.  So 32% of free money (assuming sal. sac.).  With hrt it is only 2% NI relief so 42% in total.  In my last years working I put 100% of my salary into my pensions.  Most Sal Sac (above min. wage) and the rest into a sipp.  I lived from savings.  Allowed me retire literally years early.  It's even easier now with some of the allowances increased.

namooo

Thank you for the comments so far.

To answer a couple of questions...

• I believe they do allow me to add in any amount into my pension pre tax (wasn't aware this wasn't allowed everywhere so apologies if misunderstood).

• I'm late 30's no debt, but saving for a deposit for a house and expecting to buy in 2024. (As I'm planning to buy I'm probably not going to change anything until that has gone through so it wont affect any mortgage affordability calculations).

I am quite careful and used to manage on the salary pre increase including saving so it seems like a good idea to stash the extra into a pension (getting 100% of the over into a pension vs losing 40% of it to tax). I feel like im missing something though and want to see/understand the numbers better.

Albermarle

(getting 100% of the over into a pension vs losing 40% of it to tax)

I was madly trying to save for my retirement but I could have got lots of tax back if I had put more in. I have got tax back on my contributions this year but I could have got previous years as well. 

To be 100% accurate you never get 'tax back' as such.
You pay tax as normal and any tax relief on pension contributions goes into the pension. The pension pot on withdrawal will normally be subject to income tax.
So it is not like a tax rebate for example, although for sure for a 40% taxpayer pension contributions are a tax friendly thing to do. 

jamesd

For typical private sector personal pensions 25% is added to your net contribution to give you the gross. You tell HMRC your expected gross and they increase your basic rate band by that much to give you higher rate relief and adjust your tax code. The basic rate relief goes into the pension and the higher rate into your pocket.

For salary sacrifice pensions 100% of the sacrifice goes into the pension, the after sacrifice amount is reported to HMRC and you do nothing, getting all of the relief into the pension automatically. The saved employee NI goes into your pocket. Often employers share some of their NI saving and this goes into the pension. Larger private sector schemes are likely to use this.

Net pay schemes work like salary sacrifice but don't have the NI benefit. It seems more common in the public sector and some big private employers that had final salary pensions.

We have three ways of doing it for historic reasons.

QrizB

Welcome back @jamesd !

westv

QrizB said:

Welcome back @jamesd !

Indeed. He has been away for quite a while. Hope all is well.

Albermarle

QrizB said:

Welcome back @jamesd !

Maybe Bowlhead99 next ?
Or Thrugelmir's forecasts of doom