Am I a 20% or 40% Tax Payer?

DanglyBits

My regular salary is £64k - taxed at 20% on £50k = £10,000 and 40% on £14k = £5,600 so my total tax bill is £15,600

However I am sacrificing 50% of my salary into my workplace pension, so reducing my salary to £32k - taxed at 20% = £6,400

So I'm saving £9,200 in tax, is that right?

Phoenix72

You are forgetting about your tax free personal allowance of £12,570.

Also if you salary sacrifice you save on NIC.

molerat

On 64K, and assuming 1257 code, you would pay £13028 tax and £3289.92 NI = £16317.92.  On £32K you will pay £3884 tax and £1553.28 NI = £5437.28 so saving £9880.64.

Albermarle

Although remember that tax saving is now in your pension, which when you take it will be 25% tax free, and the rest taxed at 20% ( or 40% if you have a high income at the time). Plus of course you can not touch it until later.

So pension tax relief is a great thing, especially at 40%, but comes with some restrictions.

Veteransaver

DanglyBits said:

My regular salary is £64k - taxed at 20% on £50k = £10,000 and 40% on £14k = £5,600 so my total tax bill is £15,600

However I am sacrificing 50% of my salary into my workplace pension, so reducing my salary to £32k - taxed at 20% = £6,400

So I'm saving £9,200 in tax, is that right?

You are saving 20% tax on the bit between £32k-50k. And 40% on the bit over £50k.
Also if it is all salary sacrifice you are saving additional 8% NI on the first bit, and 2% on the 2nd bit.
You'll also be entitled to full child benefit now if you have kids.

DanglyBits

Thanks all, so I'm right in my basic premise thinking that by sacrificing 50% of my salary into my pension takes my gross salary under the threshold therefore reduces my tax burden?

Mark_d

DanglyBits said:

Thanks all, so I'm right in my basic premise thinking that by sacrificing 50% of my salary into my pension takes my gross salary under the threshold therefore reduces my tax burden?

Yes you are correct that you are now a 20% tax payer after your salary sacrifice.  Being a 20% tax payer is also advantageous as far as savings/dividend income is concerned.