Are my sums right? Is it worth trying to mitigate?

PieHard

Hi.

Bit thick for a higher earner so I'm hoping for some help! 

My annual salary is £92k plus a car allowance of £7k. So far, I'm under the £100k bracket.

But I had a larger than expected bonus at Xmas of £30k plus I've just had some employee shares vest (I'd completely forgotten about them as they were awarded 3 years ago) and these were also valued at £30k. I have elected to sell some shares to cover the tax due so this won't be another expense. 

I contribute 6% to my pension (total £5.5k from me) so I believe my taxable pay for the year will = 92 + 7 + 30 + 30 - 5 =£154k

Is that correct? 
If so, this seems too high to then mitigate the tax impact of earning 100-125 that I keep hearing about.  What do you think?

I do have some spare cash but I have no idea on pensions so no clue on whether I could do this through work or would need to separately (is this what a SIPP is??)

Appreciate this is a completely first world problem but I never anticipated having this level of income and ive no idea how to handle it!

Any comments welcome. 

Dazed_and_C0nfused

I contribute 6% to my pension (total £5.5k from me) so I believe my taxable pay for the year will = 92 + 7 + 30 + 30 - 5 =£154k

What method is used to get the money into your pension, not all contributions reduce your taxable income.

The usual methods are,

Net pay (no tax relief is added to your contribution)
Relief at source (25% is added to your contribution)
Salary sacrifice

PieHard

It's a workplace scheme so not sure if that would be the second or third in your list, sorry.

I assume third as on my payslip it splits between total pay and total deductions. This says total pay is £8k p/m plus car allowance less pension. 

Dazed_and_C0nfused

PieHard said:

It's a workplace scheme so not sure if that would be the second or third in your list, sorry.

I assume third as on my payslip it splits between total pay and total deductions. This says total pay is £8k p/m plus car allowance less pension. 

Salary sacrifice means you don't actually contribute to the pension.

You agree to a lower salary in return for your employer contributing more to your pension. 

You are not entitled to any pension tax relief on employer contributions.  But don't have the income in the first place to pay tax or NI on.

Until you know the answer to this it's impossible for anyone to answer your original question as this is such a fundamental element of establishing your taxable income.

PieHard

OK, thanks. Could you let me know where I could find this information? Looking at my payslip, the "gross pay" amount is equal to my salary and car allowance plus bonus less the pension amount. Does that mean it's salary sacrifice?

Dazed_and_C0nfused

Salary sacrifice reduces your salary so your taxable pay will be less.  For example salary is £100k and you agree to sacrifice 6% then your taxable pay would only be 94k.  And your pay for NI purposes would be 94k, albeit that NI is calculated per pay period, not annually.

Net pay is very similar to salary sacrifice but there is no NI saving.

Relief at sour e doesn't reduce your income so 100k salary would be 100k taxable pay.  But you get 25% added to your contribution so £6k you contribute becomes £7.5k in your pension fund.

PieHard

Thank you for the explanation. Looking through then yes, it's salary sacrifice. 

Dazed_and_C0nfused

PieHard said:

Thank you for the explanation. Looking through then yes, it's salary sacrifice. 

So there is currently nothing you can deduct pension contribution wise as they are employer contributions and as such you will need to revised this as you are contributing.

I contribute 6% to my pension (total £5.5k from me) so I believe my taxable pay for the year will = 92 + 7 + 30 + 30 - 5 =£154k

But your starting point for taxable income will reflect the fact that you have sacrificed some income for those contributions.

Losing your Personal Allowance is very inefficient tax wise but you would have to be willing to sacrifice a lot more salary to avoid that.  Or make you own (significant) pension contributions. 

PieHard

So the end point of my calculation is correct but the individual components are 87 + 7 + 30 + 30 = 154

If I was to make a pension contribution, is it really only worth it if I could do £54k so to get below £100k? 

I suspect my earnings next year (24/25) will be nearer 125k - in that case, would the best course of action be to speak to my payroll to see if I could salary sacrifice an additional 25k?

Albermarle

I contribute 6% to my pension (total £5.5k from me)

Regardless of the above points, this is a very low contribution rate.

If you want some kind of similar lifestyle in retirement, and/or want to retire early you need to look at upping this significantly.

How much does your employer contribute on top of yours ?

I do have some spare cash but I have no idea on pensions so no clue on whether I could do this through work or would need to separately (is this what a SIPP is??)

IT would be easier just to contribute more to your workplace pension, especially due to the salary sacrifice. Now you are a high earner probably a good time to start increasing your knowledge about pensions, savings, investments and financial matters generally.

Free and impartial help with money, backed by the government | MoneyHelper

Pensions: Everything you need to know for retirement - MSE (moneysavingexpert.com)

PieHard

Albermarle said:

I contribute 6% to my pension (total £5.5k from me)

Regardless of the above points, this is a very low contribution rate.

If you want some kind of similar lifestyle in retirement, and/or want to retire early you need to look at upping this significantly.

How much does your employer contribute on top of yours ?

I do have some spare cash but I have no idea on pensions so no clue on whether I could do this through work or would need to separately (is this what a SIPP is??)

IT would be easier just to contribute more to your workplace pension, especially due to the salary sacrifice. Now you are a high earner probably a good time to start increasing your knowledge about pensions, savings, investments and financial matters generally.

Free and impartial help with money, backed by the government | MoneyHelper

Pensions: Everything you need to know for retirement - MSE (moneysavingexpert.com)

Appreciate the links, thanks as I do know I need to swot up but I wasn't sure where to start so I'll use these. 

There's a further 11% contribution from my employer so 17% in total. I was going to ask what an appropriate percentage to contribute would be but I'm aware that's probably dependent on a few factors. I do know how much is in my pot at the moment and the projected outcome at my retirement age (albeit there's a big range!)

Also know I should up my workplace pension in general which I'll get on asap. My question was more specific re this tax year as if I needed to put a big chunk in it would be more than my total pay. So on that basis, I assume I would have to do outside of payroll.