Personal savings allowance and staying out of higher rate tax band

Emily_Joy

If you get a (sort of) expensive bicycle under Cycle to Work scheme, would this reduce the taxable income? Similarly, how about Bupa health insurance, if the employer offers it as a benefit?... Do I get it right that ISA interest does not count to taxable income at all?

pecunianonolet

Dazed_and_C0nfused said:

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.

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.

Do you mind explaining this in a bit more detail for dummies, please?

ColdIron

pecunianonolet said:

Dazed_and_C0nfused said:

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.

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.

Do you mind explaining this in a bit more detail for dummies, please?

When you make a RAS contribution HMRC will increase your basic rate band of £37,700 (£50,270 minus £12,570 for most) by your gross pension contribution

Last year I made a £2,880/£3,600 contribution and they raised my basic rate band by £3,600 to £41,300. It effectively raises your higher rate threshold by the same amount. £53,870 in my case

pecunianonolet

ColdIron said:

pecunianonolet said:

Dazed_and_C0nfused said:

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.

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.

Do you mind explaining this in a bit more detail for dummies, please?

When you make a RAS contribution HMRC will increase your basic rate band of £37,700 (£50,270 minus £12,570 for most) by your gross pension contribution

Last year I made a £2,880/£3,600 contribution and they raised my basic rate band by £3,600 to £41,300. It effectively raises your higher rate threshold by the same amount. £53,870 in my case

Thanks for this and it certainly helps but I am still not fully clear  (and I might not be the only one)

Let's assume the below figures:

P60 income	£55,000.00
Interest income	£600.00
Total income	£55,600.00
Tax free allowance	£12,570.00
Taxable income	£43,030.00

Now due to a RAS scheme certain contributions are made by the employer and employee. Let's assume the employer contribution is £200 and the employee contribution is also £200 net monthly.

So the pension provider receives:

£200 employer contribution
£200 employee contribution net = £250 employee contribution gross (200 x 1.25)
= £450 per month into the pension pot

£450 x 12 months = £5400

Now, as a higher rate tax payer the next step would be to phone HMRC and tell them that £5400 of gross pension contributions have been made. Tax relief is now worked out and I would usually get a cheque and overpaid tax back into my bank account. 

ColdIron said:

Earnings and savings interest (amongst other things) count as income so he will need to make a gross pension contribution equal to the excess

Does he use his full ISA allowance each year?

You say that a gross pension contribution equal to the excess needs to be made (ISA allowance fully utilised)

So total income is £55,600. 

If I now subtract £5400 made pension contributions it takes me to £50.200. Therefore, I should be below the £50,270 threshold for higher rate tax and the full £1000 PSA should apply.


What I don't understand:

- Is this the right way to get the PSA back up to £1000 or will it remain at £500?

- How do I now work out what extra contribution I would need to make, if the above is wrong?

- Scottish income tax makes it a lot more complicated I guess so does it really matter or is it just a slightly more complex calculation due to the various bands? 

Hope this makes sense and explains where I got stuck.

Thank you!

Dazed_and_C0nfused

So the pension provider receives:

£200 employer contribution
£200 employee contribution net = £250 employee contribution gross (200 x 1.25)
= £450 per month into the pension pot
£450 x 12 months = £5400

Now, as a higher rate tax payer the next step would be to phone HMRC and tell them that £5400 of gross pension contributions have been made. Tax relief is now worked out and I would usually get a cheque and overpaid tax back into my bank account.

You cannot claim tax relief on employer contributions, only your own.

So in the example above the gross contribution would be £3,000 and that is the amount you tell HMRC about. This will increase your basic rate band by £3,000 (£37,700 to £40,700).

Is this the right way to get the PSA back up to £1000 or will it remain at £500?

To check the amount of savings nil rate band (aka Personal Savings Allowance) you are entitled to you need to calculate your tax liability ignoring the nil rate band.  If you are a basic rate payer you can then include the £1,000 savings nil rate band.

If you are a higher rate payer you use £500

pecunianonolet

Dazed_and_C0nfused said:

So the pension provider receives:

£200 employer contribution
£200 employee contribution net = £250 employee contribution gross (200 x 1.25)
= £450 per month into the pension pot
£450 x 12 months = £5400

Now, as a higher rate tax payer the next step would be to phone HMRC and tell them that £5400 of gross pension contributions have been made. Tax relief is now worked out and I would usually get a cheque and overpaid tax back into my bank account.

You cannot claim tax relief on employer contributions, only your own.

So in the example above the gross contribution would be £3,000 and that is the amount you tell HMRC about. This will increase your basic rate band by £3,000 (£37,700 to £40,700).

Is this the right way to get the PSA back up to £1000 or will it remain at £500?

To check the amount of savings nil rate band (aka Personal Savings Allowance) you are entitled to you need to calculate your tax liability ignoring the nil rate band.  If you are a basic rate payer you can then include the £1,000 savings nil rate band.

If you are a higher rate payer you use £500

Thanks and an oversight of me, it's late in the day and indeed it's only my own contributions I can claim tax relief on so £3,000 in this example.

On the second part, I am still dazed and confused what I need to do. I found this on the HMRC community board but I still don't get it and seems like contradicting info in there as well. 

ColdIron

pecunianonolet said:

ColdIron said:

pecunianonolet said:

Dazed_and_C0nfused said:

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.

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.

Do you mind explaining this in a bit more detail for dummies, please?

When you make a RAS contribution HMRC will increase your basic rate band of £37,700 (£50,270 minus £12,570 for most) by your gross pension contribution

Last year I made a £2,880/£3,600 contribution and they raised my basic rate band by £3,600 to £41,300. It effectively raises your higher rate threshold by the same amount. £53,870 in my case

ColdIron said:

Earnings and savings interest (amongst other things) count as income so he will need to make a gross pension contribution equal to the excess

Does he use his full ISA allowance each year?

You say that a gross pension contribution equal to the excess needs to be made (ISA allowance fully utilised)

So total income is £55,600. 

If I now subtract £5400 made pension contributions it takes me to £50.200. Therefore, I should be below the £50,270 threshold for higher rate tax and the full £1000 PSA should apply.

You can't use employer contributions (they only count towards the Annual Allowance) only your gross contributions can be used

- Is this the right way to get the PSA back up to £1000 or will it remain at £500?

- How do I now work out what extra contribution I would need to make, if the above is wrong?

So broadly: £55,600 puts you £5,330 above £50,270 (the excess above). Less your gross of £3,000 leaves you £2,330 you need to make up, £1,864 from you and £466 relief. You no longer pay tax at 40% so that would restore your £1,000 PSA

- Scottish income tax makes it a lot more complicated I guess so does it really matter or is it just a slightly more complex calculation due to the various bands?

You haven't mentioned Scottish Income tax before but while I am no expert at Scottish tax, my understanding is that it only applies to earned (non dividend or non interest) income. The UK rates, allowances and thresholds are used for savings, dividends and, as I understand it, pension contributions. Perhaps others may like to comment

Dazed_and_C0nfused

pecunianonolet said:

Dazed_and_C0nfused said:

So the pension provider receives:

£200 employer contribution
£200 employee contribution net = £250 employee contribution gross (200 x 1.25)
= £450 per month into the pension pot
£450 x 12 months = £5400

Now, as a higher rate tax payer the next step would be to phone HMRC and tell them that £5400 of gross pension contributions have been made. Tax relief is now worked out and I would usually get a cheque and overpaid tax back into my bank account.

You cannot claim tax relief on employer contributions, only your own.

So in the example above the gross contribution would be £3,000 and that is the amount you tell HMRC about. This will increase your basic rate band by £3,000 (£37,700 to £40,700).

Is this the right way to get the PSA back up to £1000 or will it remain at £500?

To check the amount of savings nil rate band (aka Personal Savings Allowance) you are entitled to you need to calculate your tax liability ignoring the nil rate band.  If you are a basic rate payer you can then include the £1,000 savings nil rate band.

If you are a higher rate payer you use £500

Thanks and an oversight of me, it's late in the day and indeed it's only my own contributions I can claim tax relief on so £3,000 in this example.

On the second part, I am still dazed and confused what I need to do. I found this on the HMRC community board but I still don't get it and seems like contradicting info in there as well. 

I think the issue with some of those posts that HMRC are trying to answer is that they simply don't make sense.

The latest one from richard charlton is a perfect example.  He provides a scenario where there is £60k self employment profit and £10k pension contribution (presumably £10k gross RAS contribution) and then questions if the savings nil rate band (PSA) will be £1,000 as he's a basic rate payer.

But you can only answer that if you know his total taxable income to start with.  He is a basic rate payer with just the self employment profit.  But add in some untaxed interest and he could be deemed a higher rate payer and only get £500 taxed at 0%.

pecunianonolet

Yes, I think the key bit is to work out your total income figure first which ColdIron kindly explained.

The example above was a simple one consisting of PAYE income taken from the P60, add the total figure of interest received and you have the excess over the £50,270 figure. You take away your own gross contributions already made and what is left tells you what you may still have to put in in order to restore your full PSA. 

To test if it now clicked and I understood it...

P60 income	£55,000.00
Interest income Dividends	£600.00 £300.00
Total income	£55,900.00
Tax free allowance	£12,690.00
Taxable income	£43,210.00

So the pension provider receives:

£200 employer contribution
£200 employee contribution net = £250 employee contribution gross (200 x 1.25)
= £450 per month into the pension pot

£250 x 12 months = £3,000 own gross contribution.

£55,900 - £50,270 = £5,630 excess

£5,630 - £3,000 = £2,630 I need to make up,  £2104 from myself and £526 tax relief

This would restore my £1000 PSA.

However, in this example, if you do not make the extra contribution the PSA would remain at £500 and the excess above it, in this case £100 is subject to 40% tax.

Am I right that if you try to build a cash pot (property deposit) you would be better placed not to make the extra £2104 contribution and instead keep this accessible in cash because once the pension contribution is made the funds are locked until retirement age. This would slow down deposit building and purchase and extra pension contributions are better made after purchase and with potentially higher income in the future?

We've now restored the PSA but what I not quite get yet is what other benefit the extra pension contribution would have and how this lowers my tax overall? I feel like I am missing a fundamental part somewhere. Also, what about student load repayments, how do they fit into the equation?

Sorry for the many questions :-)

Dazed_and_C0nfused

We've now restored the PSA but what I not quite get yet is what other benefit the extra pension contribution would have and how this lowers my tax overall? 

Your example doesn't make sense numbers wise but the theory is that there would be three benefits.

1.  You have a pension fund of £2,510 despite only paying £2,008.

2.  You have restored your full savings nil rate band (saving some tax)

3.  The proportion of your earnings which would have all been taxed at 40% are now taxed at 20% (another tax saving).

Plus another couple which might help others,

4.  Your adjusted net income is reduced so any HICBC for 2023-24 would be reduced.

5.  You become eligible for Marriage Allowance.

NB.  Not sure why you continue to bring employer pension contributions into this, that's just making it look more complicated than it is.