Pension contributions and tax band

rallycurve

Hi, excuse my ignorance on this topic as this might be a basic question but I want to confirm if I am getting it right. It is about pension contributions and how they can affect tax bands.

Say you earn over £50270 and therefore you are a higher-rate taxpayer. And you contribute to a workplace pension through your salary. Can these pension contributions help you go down to the basic rate tax band?
Let me use some figures to simplify things. Imagine you earn £52000 and pay 4% into your pension (plus 1% tax relief). That is £2080 plus £520 tax relief, a total contribution of £2600. My understanding is that this contribution will reduce your taxable income to below the higher rate threshold. Is this correct?

If so, what figure is used to calculate that taxable income? Is it before or after taxes: £2080 or £2600?

And if your salary was even higher and your monthly contributions did not quite take you to the lower tax band, could you make additional contributions to your workplace pension so to go down to the basic rate? Say you earn £55000 and you contribute £2200 + £550 (£2750), could you pay £2000 as a one-off and become a basic rate taxpayer? You probably would have paid 40% tax on some of this money but are now a basic-rate taxpayer, would you be able to claim that back via self assessment?

Hope this makes sense.
Many thanks!

Albermarle

You are on the right lines but you also have to take into account how your workplace contributions are made.
Via salary sacrifice - your salary is reduced and your employer pays more into your pension ( saves on NI)
Via Net pay - the contributions come out of your gross salary before it is taxed.
Via Relief at Source - contributions come from your after tax pay.

rallycurve

Thanks for you reply @Albermarle

Say it is relief at source. Would this mean we do add the 1% tax relief into the maths, as opposed to net pay?

Dazed_and_C0nfused

rallycurve said:

Thanks for you reply @Albermarle

Say it is relief at source. Would this mean we do add the 1% tax relief into the maths, as opposed to net pay?

If you are getting tax relief added to your pension fund then it is definitely relief at source.

There is no "1%" with relief at source though, that way of looking at things has recently caused confusion with another poster.

It's 25% of your (net) contribution, which equates to 20% of the gross contribution.

So if you add £400 then £100 will be added in tax relief (£100 being 20% of the £500 gross contribution).

Relief at source contributions don't reduce your taxable income, they increase your basic rate band.  Which means more income can be taxed at 20% and less at 40%. Overall result will usually be the same but you need to understand how pension tax relief works to ensure you get the outcome you want of achieve.

On the figures you are talking about there is no issue with you making larger contributions.  Just make sure they don't exceed your taxable earnings.

rallycurve

Ah okay thanks for the explanation @Dazed_and_C0nfused

So in that case where you add £400 and £100 are added in tax relief, would it mean the basic rate band will increase by £500 to £50770?

And just to confirm, it does not really matter if it is paid through your salary or via a one-off contribution, right? They both are treated identically and both increase the tax band in the same way.

Dazed_and_C0nfused

rallycurve said:

Ah okay thanks for the explanation @Dazed_and_C0nfused

So in that case where you add £400 and £100 are added in tax relief, would it mean the basic rate band will increase by £500 to £50770?

And just to confirm, it does not really matter if it is paid through your salary or via a one-off contribution, right? They both are treated identically and both increase the tax band in the same way.

You need to look at the method used.

When it's salary related it could be one of 3 methods,
Relief at source
Net pay
Salary sacrifice

They all work differently and only relief at source increases your basic rate band.

Yes, with a £500 RAS contribution your basic rate band would be £50,770.

rallycurve

Thanks a lot! It makes sense. So net pay and salary sacrifice reduce your taxable income but relief at source increases the basic rate tax band (and also the higher one I'd guess). In practice I don't really see much difference in the overall result. But good to know the differences!

Dazed_and_C0nfused

rallycurve said:

Thanks a lot! It makes sense. So net pay and salary sacrifice reduce your taxable income but relief at source increases the basic rate tax band (and also the higher one I'd guess). In practice I don't really see much difference in the overall result. But good to know the differences!

Tax wise you get the same result but relief at source involves a bit more work if you are due higher rate relief.

And salary sacrifice is usually better due to the NI you can avoid paying.

Stanley_St

Dazed_and_C0nfused said:

rallycurve said:

Thanks a lot! It makes sense. So net pay and salary sacrifice reduce your taxable income but relief at source increases the basic rate tax band (and also the higher one I'd guess). In practice I don't really see much difference in the overall result. But good to know the differences!

Tax wise you get the same result but relief at source involves a bit more work if you are due higher rate relief.

And salary sacrifice is usually better due to the NI you can avoid paying.

Just to broaden this a little.  Income tax payable may be the same for salary sacrifice and relief at source, and NI payable less for salary sacrifice, but would there be a difference for child benefit and personal savings allowance in such a case? 

Scot_39

Dazed_and_C0nfused said:

rallycurve said:

Thanks for you reply @Albermarle

Say it is relief at source. Would this mean we do add the 1% tax relief into the maths, as opposed to net pay?

If you are getting tax relief added to your pension fund then it is definitely relief at source.

There is no "1%" with relief at source though, that way of looking at things has recently caused confusion with another poster.

It's 25% of your (net) contribution, which equates to 20% of the gross contribution.

So if you add £400 then £100 will be added in tax relief (£100 being 20% of the £500 gross contribution).

Relief at source contributions don't reduce your taxable income, they increase your basic rate band.  Which means more income can be taxed at 20% and less at 40%. Overall result will usually be the same but you need to understand how pension tax relief works to ensure you get the outcome you want of achieve.

On the figures you are talking about there is no issue with you making larger contributions.  Just make sure they don't exceed your taxable earnings.

Salary sacrifice hides gross from the tax man (for tax and NI - for you and your employer) - you don't have to do anything to save or reclaim taxes.

Net - not 100% sure of

But if Relief at Source (as many SIPPs, personal pensions and in my case a few of my employer's group personal pensions paid via payroll)

But if you pay - even as I say - at least in past - via employer payroll - into a relief at source scheme (where the pension company makes up the 25% / 20% net // equivalent gross directly by claiming from tax man itself) - the income or any part of it - that you pay in - will already have been taxed at 40% - and the difference has to be reclaimed from HMRC.

Are you saying the payroll systems now adjust the basis in some way ?

I used to do reclaiming via self assessment - but HMRC prefers the personal tax account / P800 statement - for many these days with simpler affairs. 

I was salary sacrificing by time P800 style calcs introduced so not sure - but the govt link below clearly still says contact them by phone or letter - if not filing SA. 

https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

Dazed_and_C0nfused

Scot_39 said:

Dazed_and_C0nfused said:

rallycurve said:

Thanks for you reply @Albermarle

Say it is relief at source. Would this mean we do add the 1% tax relief into the maths, as opposed to net pay?

If you are getting tax relief added to your pension fund then it is definitely relief at source.

There is no "1%" with relief at source though, that way of looking at things has recently caused confusion with another poster.

It's 25% of your (net) contribution, which equates to 20% of the gross contribution.

So if you add £400 then £100 will be added in tax relief (£100 being 20% of the £500 gross contribution).

Relief at source contributions don't reduce your taxable income, they increase your basic rate band.  Which means more income can be taxed at 20% and less at 40%. Overall result will usually be the same but you need to understand how pension tax relief works to ensure you get the outcome you want of achieve.

On the figures you are talking about there is no issue with you making larger contributions.  Just make sure they don't exceed your taxable earnings.

Salary sacrifice hides gross from the tax man (for tax and NI - for you and your employer) - you don't have to do anything to save or reclaim taxes.

Net - not 100% sure of

But if Relief at Source (as many SIPPs, personal pensions and in my case a few of my employer's group personal pensions paid via payroll)

But if you pay - even as I say - at least in past - via employer payroll - into a relief at source scheme (where the pension company makes up the 25% / 20% net // equivalent gross directly by claiming from tax man itself) - the income or any part of it - that you pay in - will already have been taxed at 40% - and the difference has to be reclaimed from HMRC.

Are you saying the payroll systems now adjust the basis in some way ?

I used to do reclaiming via self assessment - but HMRC prefers the personal tax account / P800 statement - for many these days with simpler affairs. 

I was salary sacrificing by time P800 style calcs introduced so not sure - but the govt link below clearly still says contact them by phone or letter - if not filing SA. 

https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

No, you need to claim any higher rate relief from HMRC but the end result is the same tax wise.

If you claim during the year you can have a new tax code to allow the relief on a provisional basis and the SA return or P800 calculation will finalise things.