High tax payer for free child care

Gobigorgohome

Hi,

I currently earn £125k and add £750pm to my pension. I am looking at increasing pension contribution to £2100pm to bring me down to just under £100k earning. The reason I want to do this in order to qualify for free 15h for childcare. 

Would it work? I am a bit confused if that would mean that my salary is under £100k or would it not make any difference 

Marcon

Gobigorgohome said:

Hi,

I currently earn £125k and add £750pm to my pension. I am looking at increasing pension contribution to £2100pm to bring me down to just under £100k earning. The reason I want to do this in order to qualify for free 15h for childcare. 

Would it work? I am a bit confused if that would mean that my salary is under £100k or would it not make any difference 

Are you making contributions via salary sacrifice?

Gobigorgohome

Marcon said:

Gobigorgohome said:

Hi,

I currently earn £125k and add £750pm to my pension. I am looking at increasing pension contribution to £2100pm to bring me down to just under £100k earning. The reason I want to do this in order to qualify for free 15h for childcare. 

Would it work? I am a bit confused if that would mean that my salary is under £100k or would it not make any

Are you making contributions via salary sacrifice?

Yes I am through salary sacrifice

Marcon

Then your salary is going to be under £100,000.

Do you have any other income (dividends, interest etc) which might push you over the £100K mark?

Gobigorgohome

Not really, don’t have any savings except of one small isa. The only interest might be from current account but it would be pretty low 

Kernowshep

Definitely a good move especially if you're making the payment by salary sacrifice because it'll cost you much less than £2100 pcm in your take home pay because you'll be saving 62% in tax & NI, and your employer may add their NI savings meaning you could get another 13.8% added to your pension contribution too. 

Gobigorgohome

Kernowshep said:

Definitely a good move especially if you're making the payment by salary sacrifice because it'll cost you much less than £2100 pcm in your take home pay because you'll be saving 62% in tax & NI, and your employer may add their NI savings meaning you could get another 13.8% added to your pension contribution too. 

Thank you for reassurance. 

Unfortunately my employer only adds minimum and wouldn’t increase it. 

Would it not be 40% I’m saving in tax and NI? How would it be 62%? I am a bit clueless on this. 

JoeCrystal

People with income above £100,000 will have their personal allowance reduced – if their income is high enough, they will not get a personal allowance at all.

NoMore

Gobigorgohome said:

Kernowshep said:

Definitely a good move especially if you're making the payment by salary sacrifice because it'll cost you much less than £2100 pcm in your take home pay because you'll be saving 62% in tax & NI, and your employer may add their NI savings meaning you could get another 13.8% added to your pension contribution too. 

Thank you for reassurance. 

Unfortunately my employer only adds minimum and wouldn’t increase it. 

Would it not be 40% I’m saving in tax and NI? How would it be 62%? I am a bit clueless on this. 

No between 100k and 125k you have an effective tax rate of 62% (including NI) due to the gradual loss of the Tax allowance. This is why its very effective to use pensions to avoid this high rate.

To break it down,
NI is 2% above ~50k.
At above 100k, you lose £1 allowance for every £2 above, so now you are paying 20% on this amount where previously it was 0%
The income tax rate above ~50k is 40%. This all adds up to a effective tax rate of 62%

Simon11

Gobigorgohome said:

Hi,

I currently earn £125k and add £750pm to my pension. I am looking at increasing pension contribution to £2100pm to bring me down to just under £100k earning. The reason I want to do this in order to qualify for free 15h for childcare. 

Would it work? I am a bit confused if that would mean that my salary is under £100k or would it not make any difference 

I am really surprised that on a salary like this, you haven't considered opportunities to maximise your financial position and give you more opportunities to retire early.

I would really challenge you to review your financial position, review your retirement aims (together with partner if applicable) and then put together a strategy. 

Personally if I was in your position, I would be throwing in the full £60k per year available into the pension pot tax free (which may not last under this new government). May mean that you also get some child benefits too, which offset your pay per month.

Gobigorgohome

Simon11 said:

Gobigorgohome said:

Hi,

I currently earn £125k and add £750pm to my pension. I am looking at increasing pension contribution to £2100pm to bring me down to just under £100k earning. The reason I want to do this in order to qualify for free 15h for childcare. 

Would it work? I am a bit confused if that would mean that my salary is under £100k or would it not make any difference 

I am really surprised that on a salary like this, you haven't considered opportunities to maximise your financial position and give you more opportunities to retire early.

I would really challenge you to review your financial position, review your retirement aims (together with partner if applicable) and then put together a strategy. 

Personally if I was in your position, I would be throwing in the full £60k per year available into the pension pot tax free (which may not last under this new government). May mean that you also get some child benefits too, which offset your pay per month.

Thank you for responding. My priority has been to reduce the mortgage (which still is), currently just under £500k. I am 50 and cannot retire until my mortgage is paid off as i would not be able to afford it.