Tax brackets for savings interest income - Do I include salary sacrifice pension contributions?
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What_time_is_it
Posts: 643 Forumite
Hi there.
I'm trying to work out how to balance savings between myself and my partner for the 24/25 tax year to ensure that neither of us go into the higher rate tax bracket on our savings interest.
I currently make quite a large contribution each month to my pension via salary sacrifice. So which figure do I use to work out my total income over the year? The original gross income, or my income after the salary sacrifice?
e.g. £4,000 a month gross. Less £1,000 salary sacrifice.
Is that £4,000 income for tax purposes, or £3,000?
This is purely to work out whether my annual income will go into the higher rate bracket once I add on the interest from savings over the next tax year. I am close to the £50k cut-off and want to make sure I don't go over it.
Thanks!
I'm trying to work out how to balance savings between myself and my partner for the 24/25 tax year to ensure that neither of us go into the higher rate tax bracket on our savings interest.
I currently make quite a large contribution each month to my pension via salary sacrifice. So which figure do I use to work out my total income over the year? The original gross income, or my income after the salary sacrifice?
e.g. £4,000 a month gross. Less £1,000 salary sacrifice.
Is that £4,000 income for tax purposes, or £3,000?
This is purely to work out whether my annual income will go into the higher rate bracket once I add on the interest from savings over the next tax year. I am close to the £50k cut-off and want to make sure I don't go over it.
Thanks!
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Comments
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What_time_is_it said:Hi there.
I'm trying to work out how to balance savings between myself and my partner for the 24/25 tax year to ensure that neither of us go into the higher rate tax bracket on our savings interest.
I currently make quite a large contribution each month to my pension via salary sacrifice. So which figure do I use to work out my total income over the year? The original gross income, or my income after the salary sacrifice?
e.g. £3,000 a month gross. Less £1,000 salary sacrifice.
Is that £3,000 income for tax purposes, or £2,000?
Thanks!
You do of course start with a lower taxable pay figure because of agreeing to sacrifice some salary.1 -
@Dazed_and_C0nfused This is exactly what I'm not sure about!
In the example given above, how much would count?
Would I be deemed to have earned £4,000 (£48,000 over the year and therefore close to the threshold for the higher rate), or £3,000 (£36,000 over the year and miles away from the higher rate threshold)?0 -
Your payslips should tell you how much earnings you have accrued to date.
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What_time_is_it said:@Dazed_and_C0nfused This is exactly what I'm not sure about!
In the example given above, how much would count?
Would I be deemed to have earned £4,000 (£48,000 over the year and therefore close to the threshold for the higher rate), or £3,000 (£36,000 over the year and miles away from the higher rate threshold)?
But if your taxable earnings are £2,000/month and remain the same each month throughout the year then your P60 will show taxable pay of £24k.
You can never deduct salary sacrifice contributions as they are employer contributions, you have not paid them.0 -
masonic said:Your payslips should tell you how much earnings you have accrued to date.
In total payments it shows my basic salary and then the amount deduction by the pensions salary exchange to give a total payments figure for the month.
On the right it adds up income tax and national insurance deductions to give the total deductions figure for the month.
Bottom right is total payments less total deductions to give "net payment" for the month.
There are also cumulative figures - "total gross" and "taxable gross".
These are both the same and represent the cumulative total over the tax year of total payments less total deductions.
So, for the purposes of working out whether the interest on my savings will take me into the higher rate tax bracket, which figure do I use as my annual salary?
12x£4k? (total salary)
12x£3k? (total salary less salary exchange)
???0 -
Dazed_and_C0nfused said:What_time_is_it said:@Dazed_and_C0nfused This is exactly what I'm not sure about!
In the example given above, how much would count?
Would I be deemed to have earned £4,000 (£48,000 over the year and therefore close to the threshold for the higher rate), or £3,000 (£36,000 over the year and miles away from the higher rate threshold)?
But if your taxable earnings are £2,000/month and remain the same each month throughout the year then your P60 will show taxable pay of £24k.
You can never deduct salary sacrifice contributions as they are employer contributions, you have not paid them.
I think I am getting confused on the terminology here.
What I'm asking is whether my income should be treated as my full basic, or my basic less salary sacrifice.
It sounds like you are saying that I should use the income figure AFTER salary sacrifice has taken effect (i.e. my basic LESS the salary sacrifice).
Sorry if I'm not being clear, but I find this quite hard to navigate!
Thanks again.0 -
Also, it sounds like "taxable pay" might be the key figure here? Is that correct?
Is that what HMRC would use to determine whether your savings interest takes you over a tax threshold?
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YEs, Its taxable pay that counts.
You need to add your savings interest to your taxable pay (to get your total taxable income).1 -
What people are trying to get you to understand is the implication of Salary Sacrifice.
Salary Sacrifice is a contractual arrangement whereby you agree to sacrifice £XXXX from your contracted salary, e.g. reduce your contracted salary by £XXXX, and the employer agrees to pay the same £XXXX in to your pension (usually).
By doing this the employer does not pay you £XXXX and avoids having to pay employer NIC at 13.8% on £XXXX, and because the employee does not actually receive the £XXXX they avoid paying tax on the £XXXX and NICs of 10% basic rate band (going to 8% after 6 April) and 2% in the HRT band on the same.
Because you have agreed to sacrifice (forgo) £XXXX your reportable gross is the lower amount. HMRC only ever know about your (reduced) reportable gross figure. You only ever have to concern yourself with the (reduced) gross income figure. Your contracted salary is neither here nor there, it is all about the reduced gross income.
As already said, contributions under SS are employer only contributions. I appreciate that your payslip is likely to list your contracted monthly gross and will list the contribution amount/percentage as if it is coming out of your contracted salary, but the two very different things. Your salary is simply representing your contracted salary position, whereas the gross taxable income number will be your reduced (sacrifice) total earnings.Personal Responsibility - Sad but True
Sometimes.... I am like a dog with a bone1 -
What_time_is_it said:masonic said:Your payslips should tell you how much earnings you have accrued to date.
In total payments it shows my basic salary and then the amount deduction by the pensions salary exchange to give a total payments figure for the month.
On the right it adds up income tax and national insurance deductions to give the total deductions figure for the month.
Bottom right is total payments less total deductions to give "net payment" for the month.
There are also cumulative figures - "total gross" and "taxable gross".
These are both the same and represent the cumulative total over the tax year of total payments less total deductions.
So, for the purposes of working out whether the interest on my savings will take me into the higher rate tax bracket, which figure do I use as my annual salary?
12x£4k? (total salary)
12x£3k? (total salary less salary exchange)
???It would be best to use the cumulative total/taxable gross, and then add on any further payments you expect to receive before the end of the tax year. When all 12 payments have been made, this will correspond to the figure on your P60. Divide by the number of months you've been paid for to confirm which monthly figure has been used to make up your taxable pay.If you just multiply up from one month's figure, it will not account for any variations to monthly pay over the year.1
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