Making the most of my Salary

homer2018

Hello Everyone,

  I earn a pretty decent amount as a contractor but need advice on how to reduce my tax liability and get the most of a pension in place as I'm starting late with around 10 years left before retirement age...

  As I'm earning over £125k I have no Tax Code other than 0, and paying around £50k a year tax.

  If I contribute a regular sum into a Pension plan like a SIPP would this reduce my tax liability and at the same time get a nice Pension in place?

  ie if I said £50k into a pension leaving £75k salary am I correct in saying my Gross would be £75k for tax purposes?  and that any deductions like NI, etc would be based on the £75k?

  I'm also concerned, as I pay CMS which is also based upon Gross Salary (but before deductions including SIPP) hence I'm struggling to work out how much to keep as earnings to pay the CMS but enough to get my pension into place and enough to live on...

  Any calculators out there would be appreciated... or financial advisors if there are ones that specialise in this...

  I'm also struggling with HMRC / CMS not understanding how a contractor work, I'm not Self-Employed nor Employed but a mixture of both as I operate under an Umbrella company, Inside IR35.

  Thanks

  Paul 

Dazed_and_C0nfused

If you make personal (relief at source) contributions to a SIPP they do not reduce your taxable income.

But they do reduce your adjusted net income and it's adjusted net income which determines your Personal Allowance.

So if your total taxable income was £125k and you added £50k (gross) to a SIPP your taxable income is still £125k

But you would get the full Personal Allowance.

ali_bear

Do you take any kind of financial advice? 

I don't know how contracting works these days but I am surprised you are not already contributing the maximum to your pension each year, through the most tax-efficient route. Unless you are very public-spirited. 

DullGreyGuy

homer2018 said:
I'm also struggling with HMRC / CMS not understanding how a contractor work, I'm not Self-Employed nor Employed but a mixture of both as I operate under an Umbrella company, Inside IR35.

Sounds like you are the one confused. If you are operating via a standard umbrella company you are legally an employee of the umbrella. 

Have you spoken to the Umbrella about your options? Do they support salary sacrifice? Are you locked into this umbrella or does your client/agency allow you to use a range of umbrellas? 

ali_bear said:

I don't know how contracting works these days but I am surprised you are not already contributing the maximum to your pension each year, through the most tax-efficient route. Unless you are very public-spirited. 

The vast majority of contractors I know arent putting the maximum into their pension, a large number of them are happy living up their life today with several struggling to pay their taxes in January. 

homer2018

So I do have SIPP payments set up but not the best amount per week.

They (Umbrella company) have been good so far... 

With the definition of Employee / Self Employed its not one or the other, I don't get Holiday Pay, Sick Pay and I'm Furloughed over Christmas without pay (2 weeks) .  

  For Umbrella companies I have to use a FCSA approved one as its a requirement as I've been stung by other ones severely in the past.

  I'm thinking of changing my SIPP payments to something like quadruple the previous amount per week as it brings down my net income but not sure how this would affect my tax / NI / CMS payments...

  Also how do you get HMRC to top up the payments made via SIPP?   Is it just a letter to HMRC with the account details?

Dazed_and_C0nfused

homer2018 said:

So I do have SIPP payments set up but not the best amount per week.

They (Umbrella company) have been good so far... 

With the definition of Employee / Self Employed its not one or the other, I don't get Holiday Pay, Sick Pay and I'm Furloughed over Christmas without pay (2 weeks) .  

  For Umbrella companies I have to use a FCSA approved one as its a requirement as I've been stung by other ones severely in the past.

  I'm thinking of changing my SIPP payments to something like quadruple the previous amount per week as it brings down my net income but not sure how this would affect my tax / NI / CMS payments...

  Also how do you get HMRC to top up the payments made via SIPP?   Is it just a letter to HMRC with the account details?

The pension company do it automatically, you don't do anything other than make the net payment.

El_Torro

It's been quite a few years since I used an Umbrella Company but at the time I was offered to join their pension scheme using salary sacrifice. If your current Umbrella Company don't offer this it's worth finding one that does. Not only do you save on Income Tax and Employee's National Insurance contributions, you also reduce your Employer's National Insurance. This coupled with the possibility to reduce your salary below £100k a year means that your net take home pay will barely change, even with a lot of money going into your pension.