Personal savings allowance and staying out of higher rate tax band

ColdIron

housebuyer143 said:

Just to make sure I have this right then. If he can reduce his earnings after pension contributions down to £49k, that will allow him £1k savings interest and he will still be under the HR threshold assuming he doesn't go over the savings allowance or earn anything else?

Broadly yes. The mechanics will depend on how he contributes to his pension. If it's using salary sacrifice from untaxed money it will reduce his salary to, in your example, £49k. If it's relief at source, from taxed money, it won't reduce his salary but effectively raise the higher rate threshold from £50,270 to, say, £53,270

I am guessing that he only had the pay rise for some of the previous 12 months and you have 2024/25 in mind? If not he needs to get a wiggle on

housebuyer143

ColdIron said:

housebuyer143 said:

Just to make sure I have this right then. If he can reduce his earnings after pension contributions down to £49k, that will allow him £1k savings interest and he will still be under the HR threshold assuming he doesn't go over the savings allowance or earn anything else?

Broadly yes. The mechanics will depend on how he contributes to his pension. If it's using salary sacrifice from untaxed money it will reduce his salary to, in your example, £49k. If it's relief at source, from taxed money, it won't reduce his salary but effectively raise the higher rate threshold from £50,270 to, say, £53,270

I am guessing that he only had the pay rise for some of the previous 12 months and you have 2024/25 in mind? If not he needs to get a wiggle on

Thanks, I'm quite sure it's salary sacrifice his work do so I'll get him to check and then work out the percentage to bring it down to £49k.
Payrise is either starting this month or next so shouldn't cause problems for this year, but definitely wanted it sorted for next month. 
They only announced the payrise last week and we didn't think it was going to be enough to push him into higher this year, but it was. 

Appreciate all the replies because honestly because of student loan at 9% if he doesn't reduce it then anything over £50k and he's losing more than half to tax and NI which feels so wrong. Fiscal drag at it's best! 

ColdIron

housebuyer143 said:

Appreciate all the replies because honestly because of student loan at 9% if he doesn't reduce it then anything over £50k and he's losing more than half to tax and NI which feels so wrong.

Technically it's only 40% plus 2% NI, once into HRT, not half. You only paid 12% NI (now 10%, soon to be 8%) at basic rate

Still, SS is a very good thing. All your contributions go into your pension without you having to claim some of it back. You pay less NI and so does your employer (13.8%), many will pass some of the benefit back to you

Fiscal drag at it's best!

Get used to it, it's here until 2028. But tax relief at 40% is very generous and SS is the best way to do it, so make hay while the sun shines. It may not last forever and your future selves will thank you for it

Ocelot

Bear in mind any interest beyond the personal savings allowance (500 or 1000) will also reduce his tax free allowance, making the higher rate kick in at a lower earnings level, once HMRC have lowered his tax code.

ColdIron

Ocelot said:

Bear in mind any interest beyond the personal savings allowance (500 or 1000) will also reduce his tax free allowance, making the higher rate kick in at a lower earnings level, once HMRC have lowered his tax code.

That's kinda the point. They reduce your personal allowance to recoup tax from previous years but it doesn't make you worse off going forward

Think of it this way: If you paid the tax owed straight away and your PA and HRT threshold remained unchanged the taxman gets the same amount. If you subsequently get a pay rise or earn more interest beyond the PSA and that pushes you into HRT, well them's the rules, you'll pay the same extra tax either way, nobody's being diddled or paying more tax

yungturl

ColdIron said:
Technically it's only 40% plus 2% NI, once into HRT, not half. You only paid 12% NI (now 10%, soon to be 8%) at basic rate

I believe the OP meant including their student loan (which it sounds like won't paid off, and so is functioning more like a graduate tax). So their effective tax rate is 51% (40 inc tax + 2 NI + 9 SL)

Poetic coincidence that graduates have a 51% tax rate above £51k

Edit: salary sacrifice relief is also 49% for graduates at source (better than 40% without student loan), and as mentioned elsewhere may be matched by employer NI contributions in some cases (again assuming student loan never paid back)

NameWithheld

Sorry to ask in someone else's thread, but I have a similar issue. Due to a company split/spin off next week, I expect to receive a significant taxable dividend before the end of the tax year. The exact amount is as yet unknown, but it could well take me over the higher rate threshold. I claim the marriage allowance and have just under £1000 of interest.

It is too late to make any more salary sacrifice payments into my pension scheme, but they do have the option to make direct contributions where they add basic rate tax relief to the amount paid. 

If I do this would it keep me in the basic rate band

Dazed_and_C0nfused

NameWithheld said:

Sorry to ask in someone else's thread, but I have a similar issue. Due to a company split/spin off next week, I expect to receive a significant taxable dividend before the end of the tax year. The exact amount is as yet unknown, but it could well take me over the higher rate threshold. I claim the marriage allowance and have just under £1000 of interest.

It is too late to make any more salary sacrifice payments into my pension scheme, but they do have the option to make direct contributions where they add basic rate tax relief to the amount paid. 

If I do this would it keep me in the basic rate band

Yes.

That would be a relief at source (RAS) contribution and the gross contribution increases your basic rate band.

So say you pay £2,000 then the pension company adds £500 to your pension fund for the basic rate relief and once you notify HMRC they will calculate your tax liability using an increased basic rate band of £40,200 instead of £37,700.

pecunianonolet

Is anyone able to break this down a little more as I am not sure I understand this properly?

Let's say your P60 for this tax year (received mine already) states a total income of 54k earned from employment and you earned 1500 in interest. There is no other income, no marriage allowance, no childcare, etc. Just these two sources of income. (*Numbers only for calculation and illustrative purposes)

So total income is £55.5k. In this case, PSA would be standing at £500 and 40% tax is applied to the £1000 above the PSA

What would somebody need to do with a relief at source pension scheme vs those with a net pay arrangement?

If I understood it right, relief at source won't allow you to bring the PSA back to £1000 but those with a net pay arrangement can because of the taxable pay being reduced.

What about a relief at source scheme, could somebody just make an extra contribution?

Sorry for asking in somebody else's thread.

Dazed_and_C0nfused

pecunianonolet said:

Is anyone able to break this down a little more as I am not sure I understand this properly?

Let's say your P60 for this tax year (received mine already) states a total income of 54k earned from employment and you earned 1500 in interest. There is no other income, no marriage allowance, no childcare, etc. Just these two sources of income. (*Numbers only for calculation and illustrative purposes)

So total income is £55.5k. In this case, PSA would be standing at £500 and 40% tax is applied to the £1000 above the PSA

What would somebody need to do with a relief at source pension scheme vs those with a net pay arrangement?

If I understood it right, relief at source won't allow you to bring the PSA back to £1000 but those with a net pay arrangement can because of the taxable pay being reduced.

What about a relief at source scheme, could somebody just make an extra contribution?

Sorry for asking in somebody else's thread.

You have misunderstood something somewhere along the line.

The end result can be the same, but the way it works is different.

Net pay contributions reduce the amount of taxable income.  For example salary £55k with 10% net pay contributions would result in a P60 showing taxable pay of £49.5k.

Relief at source contributions don't change your taxable income but they do increase your basic rate band.  Which can mean you remain a basic rate payer even if your taxable income exceeds £50,270.