Tax on wages

Andrew68

Folks,

I know you guys out there are super good at figures and accounting and have helped me on another thread recently with investing our house sale funds....I have another challenge for you guys....(or Gals) 
;-)

Ive just recently taken the choice at age 55 of taking my PPF (Pension protection fund) pension on a monthly basis because it worked better for me. (started 1st August 23' and my tax code changed from 1257L to 1195L M1 ??  not sure why or what the M1 means !)


My tax code has stayed at 1195L M1 but I just got a letter today stating my Tax code is changing back to 1257L from 6th April.

I'm still working and not sure whether i'm optimising the least amount of tax payable on my PPF pension monthly. 
I'm conscious that the more I put into my pension the closer I get to £37,700 and only paying 20% tax rate instead of paying the 40% rate.

I earn £69,035.40/year.
My tax code will be 1257L (again) from April 24'.
My PPF is £840.08/month. I currently get £504/ month after tax !!!

I pay into my works pension a total of £21,000.84/year.
My company pays in ; £7,248.72 (not sure if this matters to me paying tax on my income)
Other things are healthcare which I think means this comes off my contribution to Tax ;     £2,033.04/year.

So, 
£69,035.40 + £10,080.96 (PPF Pension)  - £12570(allowance) - £21,000.84(pension contributions) - £2033.04(healthcare perks) =  £43,512.48.

Does this mean that at £43,512.48 I am £5,812.48 above the 20% tax threshold so all this amount is taxed at 40% hence more than 50% of my PPF taxed at this rate ?

And ; The only way to reduce to 20% tax rate is to pour £5,812.48 into my pension/year to reduce my tax ?

Is this correct or am i missing a trick somewhere ? 

Plus, why did I jump to the 1195L tax code when I started to recieve the PPF pension from 1st August 23' ?
I am basically paying 40% tax on all my PPF Pension at present so might I get a tax refund at some point for the % of my PPF that ought to be at the 20% rate ?

Thanks - if someone can assist....

Dazed_and_C0nfused

M1 means the tax code is being operated on a non cumulative basis.  Which basically means each payment is looked at in isolation, ignoring the previous months earnings/tax deducted.

The 1195L code is highly likely to be down to 40% not being deducted from the first payment so you owe a bit of tax hence the lower tax code (no-one's fault, just how PAYE works).

Forget employer contributions as far as your own tax position is concerned.

You need to clarify the method used to make the £21,000 contribution.

Net pay i.e. taxable pay is only going to be £48k, not £69k

Relief at source i.e. taxable pay remains £69k but you get basic rate relief added to your pension fund

Salary sacrifice.  This is similar to net pay but are extra employer contributions so you don't get any pension tax relief.

NB.  If it's relief at source is the £21k the net or gross contribution?

eskbanker

Andrew68 said:

Ive just recently taken the choice at age 55 of taking my PPF (Pension protection fund) pension on a monthly basis because it worked better for me. (started 1st August 23'

[...]

My PPF is £840.08/month. I currently get £504/ month after tax !!!

Surely you'd have expected sizable tax deductions when deciding to take a pension at 55 while still working in a well-paid job?  Did you model the effects of simply deferring it, rather than taking it and essentially reinvesting it back into another pension (if that's what you're now considering in a bid to avoid/minimise HR tax)?

Andrew68

i don’t understand a lot of that or the jargon used.  Sorry. 

The £21,000 is the total annual pension contribution I am making from my wage on an equal monthly basis. £21k /12 months = £1750/ month. 

Which I thought avoided tax upto 40k/year pension contributions (?) 

Andrew68

eskbanker said:

Andrew68 said:

Ive just recently taken the choice at age 55 of taking my PPF (Pension protection fund) pension on a monthly basis because it worked better for me. (started 1st August 23'

[...]

My PPF is £840.08/month. I currently get £504/ month after tax !!!

Surely you'd have expected sizable tax deductions when deciding to take a pension at 55 while still working in a well-paid job?  Did you model the effects of simply deferring it, rather than taking it and essentially reinvesting it back into another pension (if that's what you're now considering in a bid to avoid/minimise HR tax)?

Yes, I modelled it and the lump sum versus the marginal increase in pension by leaving it alone made sense to take the lump sum and decent monthly payments even with tax : we got to pay off the mortgage and with interest rates the way they are/were meant saving all the interest too.

Dazed_and_C0nfused

Andrew68 said:

i don’t understand a lot of that or the jargon used.  Sorry. 

The £21,000 is the total annual pension contribution I am making from my wage on an equal monthly basis. £21k /12 months = £1750/ month. 

Which I thought avoided tax upto 40k/year pension contributions (?) 

Unless you can say how the contributions are made it's impossible to give any useful help.

You might not need to do anything.  You might need to contact HMRC with details of your (RAS) pension contributions.

The method used is key to all this.

Andrew68

Dazed_and_C0nfused said:

Andrew68 said:

i don’t understand a lot of that or the jargon used.  Sorry. 

The £21,000 is the total annual pension contribution I am making from my wage on an equal monthly basis. £21k /12 months = £1750/ month. 

Which I thought avoided tax upto 40k/year pension contributions (?) 

Unless you can say how the contributions are made it's impossible to give any useful help.

You might not need to do anything.  You might need to contact HMRC with details of your (RAS) pension contributions.

The method used is key to all this.

The method used is through my HR dept in PAYE I contribute £1750/month into our works pension scheme which I though meant i avoided tax on my wages as long as I dont exceed 40k pension contribution in a year ?

Does that answer your question on the method of payment of my pension contributions ?

ColdIron

There are 3 methods: Relief at Source (the most common), Net Pay and Salary Sacrifice (though people tend to know if they are using this method). The first comes from post tax earnings and receives tax relief while the last two from pre tax earnings and don't (because they haven't been taxed)

jimjames

BTW the limit is now £60k per year not £40k, changed in last budget

Dazed_and_C0nfused

Andrew68 said:

Dazed_and_C0nfused said:

Andrew68 said:

i don’t understand a lot of that or the jargon used.  Sorry. 

The £21,000 is the total annual pension contribution I am making from my wage on an equal monthly basis. £21k /12 months = £1750/ month. 

Which I thought avoided tax upto 40k/year pension contributions (?) 

Unless you can say how the contributions are made it's impossible to give any useful help.

You might not need to do anything.  You might need to contact HMRC with details of your (RAS) pension contributions.

The method used is key to all this.

The method used is through my HR dept in PAYE I contribute £1750/month into our works pension scheme which I though meant i avoided tax on my wages as long as I dont exceed 40k pension contribution in a year ?

Does that answer your question on the method of payment of my pension contributions ?

Unfortunately not as employer schemes could use any one of the three options.

If you are definitely making these contributions that rules our salary sacrifice so you could check your pension account to see if 25% is being added to each contribution (that would be relief at source).

Or check your payslip to see if the pension contributions are deducted before tax is calculated (which would be net pay).  For example salary £6,000 less £1,750 = taxable pay £4,250.  You can also see the impact on your P60's i.e. salary £69k but P60 only shows taxable pay of £48k.

Andrew68

Dazed_and_C0nfused said:

Andrew68 said:

Dazed_and_C0nfused said:

Andrew68 said:

i don’t understand a lot of that or the jargon used.  Sorry. 

The £21,000 is the total annual pension contribution I am making from my wage on an equal monthly basis. £21k /12 months = £1750/ month. 

Which I thought avoided tax upto 40k/year pension contributions (?) 

Unless you can say how the contributions are made it's impossible to give any useful help.

You might not need to do anything.  You might need to contact HMRC with details of your (RAS) pension contributions.

The method used is key to all this.

The method used is through my HR dept in PAYE I contribute £1750/month into our works pension scheme which I though meant i avoided tax on my wages as long as I dont exceed 40k pension contribution in a year ?

Does that answer your question on the method of payment of my pension contributions ?

Unfortunately not as employer schemes could use any one of the three options.

If you are definitely making these contributions that rules our salary sacrifice so you could check your pension account to see if 25% is being added to each contribution (that would be relief at source).

Or check your payslip to see if the pension contributions are deducted before tax is calculated (which would be net pay).  For example salary £6,000 less £1,750 = taxable pay £4,250.  You can also see the impact on your P60's i.e. salary £69k but P60 only shows taxable pay of £48k.

So, my last payslip in January says ; Tax Year to date ; Gross pay ; £41,632.10
My December Payslip stated ; ; Tax Year to date ; Gross pay ; £37,801.81

My gross pay monthly is £5752.95 and I thought i was paying £1750/month which avoided any tax by going into my pension 

Does this information help at all ?