Higher Tax Rate & Upping Pension Contributions

Green_hopeful

Albermarle said:

(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. 

I was thinking I could have increased my salary sacrifice payments rather than putting the spare money into premium bonds. I could then get the money out so long as I didn’t go over the tax free amount each year and as a result get the 40 % tax relief and not pay national insurance. Not sure if our pension scheme allowed that but we could put our bonus in this year. Didn’t know my circumstances would change so much. Hey ho I chucked loads of money in this year instead. 

Archerychick

Green_hopeful said:

Albermarle said:

(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. 

I was thinking I could have increased my salary sacrifice payments rather than putting the spare money into premium bonds. I could then get the money out so long as I didn’t go over the tax free amount each year and as a result get the 40 % tax relief and not pay national insurance. Not sure if our pension scheme allowed that but we could put our bonus in this year. Didn’t know my circumstances would change so much. Hey ho I chucked loads of money in this year instead. 

You haven't mentioned your age, but you wouldn't be able to withdraw from your pension until you are 55. Pension investment is for your retirement. If you think you need to save money for before this age, then the pension isn't the place to do it

jamesd

While pensions are for retirement the tax relief can sometimes make them the optimal choice for some pre-retirement situations.

If you can handle 75% remaining in the pension, possibly less £30k of small pot withdrawing, a pension can be best. Age 55, rising to 57, as the earliest access age except if dying also limits use cases.

A major case where pension wins can be combining clearing a mortgage with pension provision, where the 25% lets you effectively get tax relief on your mortgage capital repayments while the 75% does the later in life provision.

Another good case can arise with salary sacrifice where the NI saving on the way in can eliminate any NI payment if you can afford to defer at least the 75%, because pension withdrawals aren't subject to NI. So you might pay in, withdraw 25% when old enough and take the 75% later, potentially repeating this every year.

Green_hopeful

Archerychick said:

Green_hopeful said:

Albermarle said:

(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. 

I was thinking I could have increased my salary sacrifice payments rather than putting the spare money into premium bonds. I could then get the money out so long as I didn’t go over the tax free amount each year and as a result get the 40 % tax relief and not pay national insurance. Not sure if our pension scheme allowed that but we could put our bonus in this year. Didn’t know my circumstances would change so much. Hey ho I chucked loads of money in this year instead. 

You haven't mentioned your age, but you wouldn't be able to withdraw from your pension until you are 55. Pension investment is for your retirement. If you think you need to save money for before this age, then the pension isn't the place to do it

Sorry I didn’t see your post. I am 54 so I can start taking money out this year. I was saving for my retirement but I didn’t understand that I could start drawing it out again at 55. 

Itsme01x

I have found this salary sacrifice calclator from Legal & General very helpful.  After I had put in the figures for me to see what percentage I needed to tell my employer to take for salary sacrifice -  the subsequent actual months net take home pay for me was within a couple of £ of the L&G calculator.

https://www.legalandgeneral.com/retirement/pensions/workplace-pensions/calculators-and-tools/salary-sacrifice-calculator/ 

 

Albermarle

Green_hopeful said:

Archerychick said:

Green_hopeful said:

Albermarle said:

(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. 

I was thinking I could have increased my salary sacrifice payments rather than putting the spare money into premium bonds. I could then get the money out so long as I didn’t go over the tax free amount each year and as a result get the 40 % tax relief and not pay national insurance. Not sure if our pension scheme allowed that but we could put our bonus in this year. Didn’t know my circumstances would change so much. Hey ho I chucked loads of money in this year instead. 

You haven't mentioned your age, but you wouldn't be able to withdraw from your pension until you are 55. Pension investment is for your retirement. If you think you need to save money for before this age, then the pension isn't the place to do it

Sorry I didn’t see your post. I am 54 so I can start taking money out this year. I was saving for my retirement but I didn’t understand that I could start drawing it out again at 55. 

It might be stating the obvious but just because you can take money out of a pension at 55, that does not necessarily make it a good idea, especially if you are still working.

Grumpy_chap

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.

The OP has not mentioned their age or family status but, if they have children, then as well as tax relief, plus possible NI savings (if SS is available), bringing salary into the basis rate band will avoid any impacts of HICBIC.  These savings for the future can become very cheap to acquire.

Green_hopeful

Re Albermarle’s comment about it not always being a good thing to withdraw your pension if you are working. 

Yes I fully understand that it depends on the circumstances. I have quite a few pensions like many others. My plan is to use my SIPP to live on until my first DB pension starts paying out at 60. My point is if you have lots of spare income because you have paid off your mortgage etc and are wondering what to do with it you might benefit from paying it into a pension rather than a savings account. Obs that depends on your circumstances