Extra pension payments to get tax back

chrisclay

Hello I am fortunate that my earnings in this tax year are going to be around £58k I have an employee pension with Nest and the the minimum payments are made into it monthly by my employers, and Nest claim the tax back at the lower rate of 20%
I am 65 years old and plan to work a few more years, and within a year I will be getting my state pension on top of my salary, this will mean an even greater percentage of my income will be taxed at 40%.
So my question is this should I pay a lump sum into the pension fund to enable me to recover some of the tax. And if so should it be difference between the 20% band and the 40% band around 8K

Thanks in advance for any advice given

Chris

Dazed_and_C0nfused

chrisclay said:

Hello I am fortunate that my earnings in this tax year are going to be around £58k I have an employee pension with Nest and the the minimum payments are made into it monthly by my employers, and Nest claim the tax back at the lower rate of 20%
I am 65 years old and plan to work a few more years, and within a year I will be getting my state pension on top of my salary, this will mean an even greater percentage of my income will be taxed at 40%.
So my question is this should I pay a lump sum into the pension fund to enable me to recover some of the tax. And if so should it be difference between the 20% band and the 40% band around 8K

Thanks in advance for any advice given

Chris

That depends if your aim is to avoid 40% tax or get a bigger pension fund.

Don't forget your existing contributions will be a factor in your calculations.

As Nest operate a relief at source scheme your income will remain unchanged but you will have a larger basic rate band (if you tell HMRC about the contributions).

Albermarle

Just to confirm you are aware that you have to inform HMRC of your pension contributions, so they can calculate the correct amount of higher rate tax relief for you ?

chrisclay

Hello thanks for the replies obviously I am keen to reduce the amount of tax I pay and if that helps me increase the size of my pension pot that would be bonus.
But it would good to know paying more into the pension fund is the best thing to do.

Thanks in advance for any replies

Dazed_and_C0nfused

chrisclay said:

Hello thanks for the replies obviously I am keen to reduce the amount of tax I pay and if that helps me increase the size of my pension pot that would be bonus.
But it would good to know paying more into the pension fund is the best thing to do.

Thanks in advance for any replies

If your taxable income is going to be £58k in the current tax year then additional pension contributions will help you avoid some or all of the higher rate tax that would otherwise be payable.

The exact amount depends on a few things, not least the method being used to get the money into the pension.

Net pay
Relief at source
Salary sacrifice 

bjorn_toby_wilde

chrisclay said:

Hello thanks for the replies obviously I am keen to reduce the amount of tax I pay and if that helps me increase the size of my pension pot that would be bonus.
But it would good to know paying more into the pension fund is the best thing to do.

Thanks in advance for any replies

I suppose the other consideration is how much you have in your pension and how much you will be withdrawing annually.

No point adding to your pension to avoid higher rate tax now if you’ll be paying higher rate tax when you withdraw it.

NoMore

bjorn_toby_wilde said:

No point adding to your pension to avoid higher rate tax now if you’ll be paying higher rate tax when you withdraw it.

Up until you have enough to cover the lump sum allowance (so a little more than a million in pension) its always  a gain to put into pension as long as you draw at the same or lower rate that you contribute at. A LISA can work out better in certain circumstances.

Extremely useful reddit post detailing all the possibilities and the gain or loss for each. PSA: Pension Tax Efficiency / Return on Investment - April 2024 : r/UKPersonalFinance

bjorn_toby_wilde

NoMore said:

bjorn_toby_wilde said:

No point adding to your pension to avoid higher rate tax now if you’ll be paying higher rate tax when you withdraw it.

Up until you have enough to cover the lump sum allowance (so a little more than a million in pension) its always  a gain to put into pension as long as you draw at the same or lower rate that you contribute at. A LISA can work out better in certain circumstances.

Extremely useful reddit post detailing all the possibilities and the gain or loss for each. PSA: Pension Tax Efficiency / Return on Investment - April 2024 : r/UKPersonalFinance

Interesting. I’ll have a good read through that.

Having skim read the article I’m not sure how it accounts for defined benefit schemes.

My thought was that, as the OP is 65, there’s a good chance they could have a defined benefit scheme coming into payment too. Would that potentially push them over the point where it becomes uneconomic?

Sarahspangles

I don’t think anyone has mentioned the option of deferring your state pension, so I will in case you weren’t aware that’s a possibility. 

NoMore

bjorn_toby_wilde said:

NoMore said:

bjorn_toby_wilde said:

No point adding to your pension to avoid higher rate tax now if you’ll be paying higher rate tax when you withdraw it.

Up until you have enough to cover the lump sum allowance (so a little more than a million in pension) its always  a gain to put into pension as long as you draw at the same or lower rate that you contribute at. A LISA can work out better in certain circumstances.

Extremely useful reddit post detailing all the possibilities and the gain or loss for each. PSA: Pension Tax Efficiency / Return on Investment - April 2024 : r/UKPersonalFinance

Interesting. I’ll have a good read through that.

Having skim read the article I’m not sure how it accounts for defined benefit schemes.

My thought was that, as the OP is 65, there’s a good chance they could have a defined benefit scheme coming into payment too. Would that potentially push them over the point where it becomes uneconomic?

In this case a DB pension is just a source of income so could affect the tax bracket on withdrawal, and if any TFLS would use some of the LSA, so the adage still applies, if you have not yet reached the LSA, then contributing at the same or lower level as withdrawal is still a tax advantage. Subject to the limits on pension contributions like the Annual Allowance and the tax relief limit. 

bjorn_toby_wilde

It’s a very good point. Thanks for that. Food for thought.