Savings interest in 40% band

[Deleted User]

I am a basic rate taxpayer (on net pay scheme) but will become a 40% taxpayer when my added savings interest goes into that band. So after the £500 psa, I will start paying the 40% even with part of the savings interest below the band threshold.

I know that by increasing pension contributions, you can avoid the 40% band. But does this only make sense if it’s salary income than savings interest? If I bought enough added Alpha pension to keep below the threshold then I would save about £1300 in savings tax. As I am also c5 years from planned retirement, added pension will be more expensive.

I do have ISAs but am very risk averse to stocks and shares investments.

Mark_d

I would increase pension contributions to keep below the 40% bracket.  In my opinion that is the best thing you can do

saajan_12

[Deleted User] said:

I am a basic rate taxpayer (on net pay scheme) but will become a 40% taxpayer when my added savings interest goes into that band. So after the £500 psa, I will start paying the 40% even with part of the savings interest below the band threshold.

I know that by increasing pension contributions, you can avoid the 40% band. But does this only make sense if it’s salary income than savings interest? If I bought enough added Alpha pension to keep below the threshold then I would save about £1300 in savings tax. As I am also c5 years from planned retirement, added pension will be more expensive.

I do have ISAs but am very risk averse to stocks and shares investments.

It doesn't make a difference - the salary and savings income is simply added together (after the various allowances) so if your savings interest is £x above the 40% threshold, you could contribute £x more from your salary to your pension, thus reducing your take home salary but with the difference being made up by the savings interest. 

Remember pension contributions just mean you don't pay the tax now. You would pay whatever your tax rate is when you withdraw the money from the pension.. usually that would be lower when retired, but if you have significant assets / savings that generate passive interest income annually, then that could push you up so you start paying some tax later. Of course that's based on the current rules and anything could change. 

Yorkie1

[Deleted User] said:

I am a basic rate taxpayer (on net pay scheme) but will become a 40% taxpayer when my added savings interest goes into that band. So after the £500 psa, I will start paying the 40% even with part of the savings interest below the band threshold.

I know that by increasing pension contributions, you can avoid the 40% band. But does this only make sense if it’s salary income than savings interest? If I bought enough added Alpha pension to keep below the threshold then I would save about £1300 in savings tax. As I am also c5 years from planned retirement, added pension will be more expensive.

I do have ISAs but am very risk averse to stocks and shares investments.

I started making additional contributions to my Civil Service pension in order to bring myself back under the 40% band limit. It doesn't make any difference whether it's for added pension, EPA (which gives you the right to take that year's pension accumulation a certain number of years early without them being reduced), AVCs (which is a stocks and shares pension run through the Civil service providers), or a completely separate standalone personal pension.

I believe that you can also use Gift Aid contributions to bring your taxable amount down a bit too.

Dazed_and_C0nfused

Yorkie1 said:

[Deleted User] said:

I am a basic rate taxpayer (on net pay scheme) but will become a 40% taxpayer when my added savings interest goes into that band. So after the £500 psa, I will start paying the 40% even with part of the savings interest below the band threshold.

I know that by increasing pension contributions, you can avoid the 40% band. But does this only make sense if it’s salary income than savings interest? If I bought enough added Alpha pension to keep below the threshold then I would save about £1300 in savings tax. As I am also c5 years from planned retirement, added pension will be more expensive.

I do have ISAs but am very risk averse to stocks and shares investments.

I started making additional contributions to my Civil Service pension in order to bring myself back under the 40% band limit. It doesn't make any difference whether it's for added pension, EPA (which gives you the right to take that year's pension accumulation a certain number of years early without them being reduced), AVCs (which is a stocks and shares pension run through the Civil service providers), or a completely separate standalone personal pension.

I believe that you can also use Gift Aid contributions to bring your taxable amount down a bit too.

Not normally no.  But Gift Aid donations can be used to increase your basic rate band, keeping more income in the basic rate band and less (or none) in the higher rate band 😃

Dazed_and_C0nfused

[Deleted User] said:

I am a basic rate taxpayer (on net pay scheme) but will become a 40% taxpayer when my added savings interest goes into that band. So after the £500 psa, I will start paying the 40% even with part of the savings interest below the band threshold.

I know that by increasing pension contributions, you can avoid the 40% band. But does this only make sense if it’s salary income than savings interest? If I bought enough added Alpha pension to keep below the threshold then I would save about £1300 in savings tax. As I am also c5 years from planned retirement, added pension will be more expensive.

I do have ISAs but am very risk averse to stocks and shares investments.

You need to look at this in two steps, firstly look at your overall liability ignoring the savings nil rate band.

That determines if you are classed as a higher rate payer or not.  If you are them you include the £500 savings nil rate band.  If not it's £1,000.

And don't forget that the £500 (or £1,000) uses up any remaining basic rate band, effectively a rate band within a rate band.

MetaPhysical

The situation gets even worse at the 100k level where your PA is gradually taken away and you lose childcare.  I saved myself many, many thousands of pounds in completely avoidable tax and have many thousands more in my pension by following @Dazed_and_C0nfused and @Albermarle advice.

Yorkie1

Dazed_and_C0nfused said:

Yorkie1 said:

I believe that you can also use Gift Aid contributions to bring your taxable amount down a bit too.

Not normally no.  But Gift Aid donations can be used to increase your basic rate band, keeping more income in the basic rate band and less (or none) in the higher rate band 😃

Ah yes, different horse for a slightly different (but similar outcome) course. Clarification much appreciated

Dazed_and_C0nfused

[Deleted User] said:

Thanks for all your replies. I will be in the higher rate band so have decided on Alpha added pension. Do my simplified maths and assumptions look ok (or not) below - sorry if these are very basic questions:

• total taxable income this tax year c£56k (48k after standard pension contributions + 8k gross savings interest).
• buy added pension lump sum (to revert to 20% taxpayer) before next tax year.
• to claim higher rate tax relief, presumably I can’t do it via my personal tax account and I don’t qualify for self assessment.
• for eg. £6k lump sum, this is increased automatically by 20% of tax relief? So I claim only for the higher rate relief by quoting the gross £7146 contribution figure? (5730 x 20% = 1146 then add to lump sum? 5730 is part of the lump sum over the 50270 threshold)
• monthly contributions for the next tax year will have automatic higher rate tax relief.

Does all this run parallel to the personal savings allowance? And as I would revert to a basic rate taxpayer after added pension, is that allowance £1k so 20% savings tax, or still £500 at 40% because my original total taxable income was in the 40% band?

Does anyone also know how fast the added pension process is at the moment? If the admin slips into the next tax year (as we are in November already), then presumably they will backdate it all.

If you are buying added Alpha pension why do you think your payment is increased by "20% of tax relief"?

Even if it was where are you getting £7,146 from 🤔.  I know you have added some figures but if 20% tax relief is being applied where does £7,146 come into things?

Your tax liability would initially be calculated factoring in any allowable pension contributions and that determines if you are a higher rate payer or not.

And once that is known the £500 or £1,000 savings nil rate band is applied.

I think your main confusion though is around Alpha added pension.  Can you provide a link which shows basic rate relief is added?  As that is usually just applicable to relief at source contributions I think you may have misunderstood something here.  But equally you may know something about Alpha added pension I don't.

Dazed_and_C0nfused

Found this on the Civil Service/Alpha pension website,

Will I get tax relief on my added pension contributions?

You’ll receive tax relief on contributions that do not exceed the limits set by HM Revenue and Customs. If the deduction comes directly from your salary then your tax relief is automatic. If you make a lump sum contribution by BACS or personal cheque, no tax relief is applied. You’ll have to claim the tax relief from HMRC directly.

Dazed_and_C0nfused

[Deleted User] said:

Thanks D&C, yes that is the para from the Alpha website.

Have I therefore misconstrued the tax relief mentioned in the para by thinking it means basic rate relief is added to the £6k then? I think I may therefore have read across some RAS guidance into the mix and then got the £7146 figure with the higher rate pension relief element also. Sorry for the confusion. 

So if I still understand correctly, I would just buy an added pension lump sum enough to bring me down from the £56k to below 50270 (the increased contributions are allowable within Alpha scheme limits) - this would not make me a higher rate taxpayer at all and the £1,000 savings nil rate band then applies?

On the tax relief mentioned in the website para, would I just be claiming then the 20% basic tax relief on the lump sum. So nothing to do with grossing up the extra pension contributions to give to HMRC and including the additional tax relief on top. That basic tax relief wouldn’t be added to the pension pot but would be returned in another way.

Sorry if I am still misunderstanding things but I think it’s all got a bit merged in my head.

There is no pension tax relief with that type of contribution.

You have to contact HMRC and claim all the relief due direct from them.  In practical terms it is a bit like getting an extra £6,000 Personal Allowance (where say you paid £6,000 by cheque direct to the civil service pension scheme administrators, not via your payslip).

If your total taxable income was £56k then a £6k contribution of this type would mean you weren't deemed to be a higher rate payer.  And would get the full £1,000 savings nil rate band.

You are unlikely to get a tax refund though.  When HMRC calculate your tax liability there will, from what you've posted so far, probably be 3 factors,

A.  You owe £1.80 due to how PAYE works
B.  You owe £1,400 on the untaxed interest
C.  You have overpaid £1,200 from the pension contribution (for this type of contribution this always benefits you, it is never added to your pension).

Sadly HMRC have a poor track record in dealing with type of contribution and you may find it takes longer than it should to get the correct tax calculation.  You really have to stress that it isn't a relief at source contribution and no tax relief was given as it was paid direct to the scheme administrator.

This thread will give you a flavour of the problems typically encountered.

https://forums.moneysavingexpert.com/discussion/6554017/nhs-pension-tax-relief-on-additional-payments