Personal savings allowance and staying out of higher rate tax band

pecunianonolet

Dazed_and_C0nfused said:

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.

--> Can you explain why it doesn't make sense? My understanding was you add up all income you have, in this example PAYE, interest, dividends. Tax free allowance adjusted due to expenses. Perhaps you could provide an example that makes sense?

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

--> £2,008 x 1.25 = £2,510 but where are those numbers coming from? Example stated £3,000 gross contributions

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

--> Does it mean a full £1,000 can be earned in interest tax free instead of only £500?

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

--> What proportion would that be?

Plus another couple which might help others,

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

--> Not applicable in my case but good advice

5.  You become eligible for Marriage Allowance.

--> Not applicable in my case but good advice

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

--> I just did copy/paste but indeed it is not relevant 

I still don't get it really so will most likely just report my own contributions made but not put anything extra in.

Also too late now for an IFA, plus the IFA cost for this would probably wipe out any potential savings

Rather have that cash now in my pocket and can spend it instead of locking it away for decades and might not see a penny of it if I before.

Anyhow, thanks for trying to explain but guess I give up on it.

Dazed_and_C0nfused

The numbers don't make sense as you have included something at the beginning (fixed rate job expenses?) then ignored that further in you calculation.

£2,510 is the gross contribution needed to ensure the £1,000 savings nil rate band is available.

Cash ISA's are tax free, interest from non cash ISA accounts is all taxable.  But some can be taxed at 0%.

If you had the £55,900 taxable income you referred to, had expenses of £120 and just paid the £3,000 RAS pension contributions then your tax liability would be as follows,

Income after PA & expenses = £43,210

£40,700 x 20% = £8,140.00 (basic rate)
£1,610 x 40% = £644.00 (higher rate)
£500 x 0% = £0.00 (savings nil rate in the higher rate band)
£100 x 40% = £40.00 (savings higher rate)
£300 x 0% = £0.00 (dividend nil rate in the higher rate band)

Total tax payable = £8,824

If you contributed a further £2,510 (gross) you would be a basic rate payer and would be taxed like this.

£42,310 x 20% = £8,462.00 (basic rate)

£600 x 0% = £0.00 (savings nil rate in the basic rate band)

£300 x 0% = £0.00 (dividend nil rate in the basic rate band)

Total tax payable = £8,462

Ocelot

ColdIron said:

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

Yes, but he may already be getting interest and have a reduced tax threshold. Mine has gone as low as 3000, making HR tax kick in at around 40k.

pecunianonolet

Dazed_and_C0nfused said:

The numbers don't make sense as you have included something at the beginning (fixed rate job expenses?) then ignored that further in you calculation.

£2,510 is the gross contribution needed to ensure the £1,000 savings nil rate band is available.

Cash ISA's are tax free, interest from non cash ISA accounts is all taxable.  But some can be taxed at 0%.

If you had the £55,900 taxable income you referred to, had expenses of £120 and just paid the £3,000 RAS pension contributions then your tax liability would be as follows,

Income after PA & expenses = £43,210

£40,700 x 20% = £8,140.00 (basic rate)
£1,610 x 40% = £644.00 (higher rate)
£500 x 0% = £0.00 (savings nil rate in the higher rate band)
£100 x 40% = £40.00 (savings higher rate)
£300 x 0% = £0.00 (dividend nil rate in the higher rate band)

Total tax payable = £8,824

If you contributed a further £2,510 (gross) you would be a basic rate payer and would be taxed like this.

£42,310 x 20% = £8,462.00 (basic rate)

£600 x 0% = £0.00 (savings nil rate in the basic rate band)

£300 x 0% = £0.00 (dividend nil rate in the basic rate band)

Total tax payable = £8,462

Thanks a lot! This makes sense now to me and I can follow the calculation using my own numbers. With Scottish rates it is a lot more complicated. I wish there would be an Excel file or even better an MSE calculator where you could just input the key numbers and you get the result. 

NameWithheld

Dazed_and_C0nfused said:

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.

Thanks. I have just paid £1500 into the pension. Do I have to notify HMRC myself, or do they get that info from the pension company?

Dazed_and_C0nfused

NameWithheld said:

Dazed_and_C0nfused said:

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.

Thanks. I have just paid £1500 into the pension. Do I have to notify HMRC myself, or do they get that info from the pension company?

You don't need to do anything to get the basic rate relief, the pension company does that.

But if you need to claim higher rate relief then you would need to sort that with HMRC, via a tax return if you complete one or by contacting them with the details if not.

pecunianonolet

Is the pension provider communicating contributions to HMRC, like in the same or similar way as banks report interest? Would make it so much easier to get the relief for higher earners applied automatically instead of having to pick up the phone and wait an hour to tell them the number. 

Dazed_and_C0nfused

pecunianonolet said:

Is the pension provider communicating contributions to HMRC, like in the same or similar way as banks report interest? Would make it so much easier to get the relief for higher earners applied automatically instead of having to pick up the phone and wait an hour to tell them the number. 

They must notify HMRC as it's HMRC who provide them with the basic rate tax relief.

But it doesn't seem that the information about your contributions feeds through to your own tax records.

Phoning at 8am sharp is apparently a good way of avoiding long wait times.

pecunianonolet

Dazed_and_C0nfused said:

pecunianonolet said:

Is the pension provider communicating contributions to HMRC, like in the same or similar way as banks report interest? Would make it so much easier to get the relief for higher earners applied automatically instead of having to pick up the phone and wait an hour to tell them the number. 

They must notify HMRC as it's HMRC who provide them with the basic rate tax relief.

But it doesn't seem that the information about your contributions feeds through to your own tax records.

Phoning at 8am sharp is apparently a good way of avoiding long wait times.

Would be so much easier if it would feed through but I guess this would also imply the government would need to apply a lot more tax relief to a lot more people. I could imagine thousands or millions don't claim the extra relief and they just take the 20% the pension provider claims.

Phoning at 8am is great for early birds, I am usually either still sleeping or in zombie state due to being a night owl. The chance of me not being switched on or able to provide accurate answers or any answers at all at that time is a high likelihood. 

Ocelot

I think it depends on how you are paying into your pension. If it is via salary sacrifice, the higher rate should be automatically applied, but not if you do it another way.