Adding to pension pot to avoid 40% tax

WindfallWendy

Multiple issues going on here, but basically I keep confusing myself on when/where the 40% threshold is. With interest, rental and PAYE income, I'm desperately trying to avoid 40% income tax, and am trying to keep below it by adding to my pension pot. 

I'd really appreciate someone more familiar with these income streams and the self assessment process, confirming (or otherwise!) that what I'm doing is being vaguely sensible.

So for 24/25 so far....
I've been on a £48k salary (gross), but for Jan-March2025 I'll be on £55k (gross)
I received £3,800 from rental income (house now sold, no more rental income).
Interest from savings is currently at £1500 (and going up, likely to be close to £2k by the end of 24/25)

So, I reckon I have about £54-56k pre tax income (gross).

Tax owed therefore breaks down into
Tax free bit: £12,570
20% charged on 12,571 - 50,270
....And then I'll be charged 40% on the rest?

Subject to of course:
Tax exempt rental income £1000

Tax exempt savings interest £1000 (assuming I'm a 20%-er)

In addition, I've made a £5k additional payment into my pension (via my employer), and will make another £3k additional payment into my new workplace pension in March 2025.

So my thinking over all is that my taxable income for 24/25 goes down from £54-56k to £44-46k (due to 2x £1000 exemptions, and £8k of pension payments).

And therefore I think I'm still only in the 20% band.

Does this make sense? Am I correct in thinking adding to my pension reduces my tax liability/taxable income?

Marcon

WindfallWendy said:

Multiple issues going on here, but basically I keep confusing myself on when/where the 40% threshold is. With interest, rental and PAYE income, I'm desperately trying to avoid 40% income tax, and am trying to keep below it by adding to my pension pot. 

I'd really appreciate someone more familiar with these income streams and the self assessment process, confirming (or otherwise!) that what I'm doing is being vaguely sensible.

So for 24/25 so far....
I've been on a £48k salary (gross), but for Jan-March2025 I'll be on £55k (gross)
I received £3,800 from rental income (house now sold, no more rental income).
Interest from savings is currently at £1500 (and going up, likely to be close to £2k by the end of 24/25)

So, I reckon I have about £54-56k pre tax income (gross).

Tax owed therefore breaks down into
Tax free bit: £12,570
20% charged on 12,571 - 50,270
....And then I'll be charged 40% on the rest?

Subject to of course:
Tax exempt rental income £1000

Tax exempt savings interest £1000 (assuming I'm a 20%-er)

In addition, I've made a £5k additional payment into my pension (via my employer), and will make another £3k additional payment into my new workplace pension in March 2025.

So my thinking over all is that my taxable income for 24/25 goes down from £54-56k to £44-46k (due to 2x £1000 exemptions, and £8k of pension payments).

And therefore I think I'm still only in the 20% band.

Does this make sense? Am I correct in thinking adding to my pension reduces my tax liability/taxable income?

Lump together all your income for the year from all sources, take off your personal allowance and any other allowances, and you've then got your taxable income for the year. 

Adding to your pension only reduces your taxable income if you make 'personal' contributions by salary sacrifice to your employer's scheme. 

If you are a higher rate taxpayer and make true 'personal' contributions (ie you pay them yourself), then this increases your basic rate tax band, which is how you get extra tax relief as a higher rate taxpayer. 

If you are a basic rate taxpayer, then you simply get basic rate tax relief on your personal contributions. If you are in a 'relief at source' scheme - most workplace pensions are these days - that tax relief is added direct to your pension pot.

saajan_12

Marcon said:

WindfallWendy said:

Multiple issues going on here, but basically I keep confusing myself on when/where the 40% threshold is. With interest, rental and PAYE income, I'm desperately trying to avoid 40% income tax, and am trying to keep below it by adding to my pension pot. 

I'd really appreciate someone more familiar with these income streams and the self assessment process, confirming (or otherwise!) that what I'm doing is being vaguely sensible.

So for 24/25 so far....
I've been on a £48k salary (gross), but for Jan-March2025 I'll be on £55k (gross)
I received £3,800 from rental income (house now sold, no more rental income).
Interest from savings is currently at £1500 (and going up, likely to be close to £2k by the end of 24/25)

So, I reckon I have about £54-56k pre tax income (gross).

Tax owed therefore breaks down into
Tax free bit: £12,570
20% charged on 12,571 - 50,270
....And then I'll be charged 40% on the rest?

Subject to of course:
Tax exempt rental income £1000

Tax exempt savings interest £1000 (assuming I'm a 20%-er)

In addition, I've made a £5k additional payment into my pension (via my employer), and will make another £3k additional payment into my new workplace pension in March 2025.

So my thinking over all is that my taxable income for 24/25 goes down from £54-56k to £44-46k (due to 2x £1000 exemptions, and £8k of pension payments).

And therefore I think I'm still only in the 20% band.

Does this make sense? Am I correct in thinking adding to my pension reduces my tax liability/taxable income?

Lump together all your income for the year from all sources, take off your personal allowance and any other allowances, and you've then got your taxable income for the year. 

Well I'd be careful which 'allowances' in the colloquial sense
- Eg the savings allowance doesn't exactly reduce your taxable income, it just defines how much of the interest is taxed at 0%. If the total interest earned exceeds the higher rate tax threshold then the savings allowance drops to the £500 level for higher rate tax payers. 
- Eg the pension annual allowance does nothing to reduce taxable income, its effectively a limit. The actual pension contribution is what counts, either lowering the taxable income or increasing the threshold depending on which method is used. 

Marcon

saajan_12 said:

Marcon said:

WindfallWendy said:

Multiple issues going on here, but basically I keep confusing myself on when/where the 40% threshold is. With interest, rental and PAYE income, I'm desperately trying to avoid 40% income tax, and am trying to keep below it by adding to my pension pot. 

I'd really appreciate someone more familiar with these income streams and the self assessment process, confirming (or otherwise!) that what I'm doing is being vaguely sensible.

So for 24/25 so far....
I've been on a £48k salary (gross), but for Jan-March2025 I'll be on £55k (gross)
I received £3,800 from rental income (house now sold, no more rental income).
Interest from savings is currently at £1500 (and going up, likely to be close to £2k by the end of 24/25)

So, I reckon I have about £54-56k pre tax income (gross).

Tax owed therefore breaks down into
Tax free bit: £12,570
20% charged on 12,571 - 50,270
....And then I'll be charged 40% on the rest?

Subject to of course:
Tax exempt rental income £1000

Tax exempt savings interest £1000 (assuming I'm a 20%-er)

In addition, I've made a £5k additional payment into my pension (via my employer), and will make another £3k additional payment into my new workplace pension in March 2025.

So my thinking over all is that my taxable income for 24/25 goes down from £54-56k to £44-46k (due to 2x £1000 exemptions, and £8k of pension payments).

And therefore I think I'm still only in the 20% band.

Does this make sense? Am I correct in thinking adding to my pension reduces my tax liability/taxable income?

Lump together all your income for the year from all sources, take off your personal allowance and any other allowances, and you've then got your taxable income for the year. 

Well I'd be careful which 'allowances' in the colloquial sense
- Eg the savings allowance doesn't exactly reduce your taxable income, it just defines how much of the interest is taxed at 0%. If the total interest earned exceeds the higher rate tax threshold then the savings allowance drops to the £500 level for higher rate tax payers. 
- Eg the pension annual allowance does nothing to reduce taxable income, its effectively a limit. The actual pension contribution is what counts, either lowering the taxable income or increasing the threshold depending on which method is used. 

Fair comment - but I think it might simplify things (without leading to any real errors) in this case, where OP seems to have really got themselves into a level of detail which is guaranteed to confuse!

penners324

Why desperate to avoid 40% tax?

In actuality it's 42%, NICs included 

SarahB16

WindfallWendy said:

Multiple issues going on here, but basically I keep confusing myself on when/where the 40% threshold is. With interest, rental and PAYE income, I'm desperately trying to avoid 40% income tax, and am trying to keep below it by adding to my pension pot. 

I'd really appreciate someone more familiar with these income streams and the self assessment process, confirming (or otherwise!) that what I'm doing is being vaguely sensible.

So for 24/25 so far....
I've been on a £48k salary (gross), but for Jan-March2025 I'll be on £55k (gross)
I received £3,800 from rental income (house now sold, no more rental income).
Interest from savings is currently at £1500 (and going up, likely to be close to £2k by the end of 24/25)

So, I reckon I have about £54-56k pre tax income (gross).

Tax owed therefore breaks down into
Tax free bit: £12,570
20% charged on 12,571 - 50,270
....And then I'll be charged 40% on the rest?

Subject to of course:
Tax exempt rental income £1000

Tax exempt savings interest £1000 (assuming I'm a 20%-er)

In addition, I've made a £5k additional payment into my pension (via my employer), and will make another £3k additional payment into my new workplace pension in March 2025.

So my thinking over all is that my taxable income for 24/25 goes down from £54-56k to £44-46k (due to 2x £1000 exemptions, and £8k of pension payments).

And therefore I think I'm still only in the 20% band.

Does this make sense? Am I correct in thinking adding to my pension reduces my tax liability/taxable income?

Probably too late to avoid paying income tax on your savings interest for 2024/25 however not too late to take advantage of putting some of this into a cash ISA or premium bonds (to minimise/avoid paying tax on your savings interest). 

For myself due to only being able to put some savings away for c.3 years I am considering a cash ISA before 5th April 2025 (to avoid income tax on savings interest). 

Bostonerimus1

Making extra pension payments via salary sacrifice would take down your taxable income and NICs. Also make sure you are using ISAs fully.

Cobbler_tone

I'd disregard your savings interest as separate to your tax bill from earnings, apart from the rate of course.

I use a simple sheet to track mine. The only 'issue' I have is a bonus payment in the last week of March, which I don't get visibility of until about a week before. If I don't want to pay 40% on most of that (if I bounce under the line) then I need to guess and increase the contribution rate in Jan/Feb or March itself.
This model is always within a couple of quid of my net pay.

WindfallWendy

Hm, yes, thank you everyone. Lots to ponder there. 

So I think I need to better understand how my new pension provider manages additional payments from me into my pension. Last year I paid £8k into my USS pension, via my employer, which effectively cancelled out any tax I owed HMRC (which was due as a result of rental income).  

Definitely working less is the ideal scenario and is what I was doing last year. But in this new job I think I might quite like it, so I'm going to see how working full time works out. I'm also thinking of taking unpaid leave to cover my summer holiday, which would have an impact on my taxable income for the year, wouldn't it? 

On my savings interest earned and the tax I will owe on that....
1) ISAs and Premium bonds are maxed out. But thanks for flagging the option.
2) I'll declare the interest earned on my tax return but if at the same time I'm going to be reporting a significant overpayment/personal payment into my pension, I think/hope the same will happen this year as last. I.e. Whilst £300 might be due on interest (for example), the tax relief on my pension payment will cancel out the tax owed and I may even get a payment from HMRC for the tax relief that hasn't been applied to the pension overpayment.

WindfallWendy

penners324 said:

Why desperate to avoid 40% tax?

In actuality it's 42%, NICs included 

I'm at the tipping point, so if I earn £1000 over the threshold, then I only see £600. So I'd rather put the £1000 beyond the threshold into my pension where it becomes £1250 in my pension, instead of just £600 in my pocket.

PaoBao

WindfallWendy said:

I'm at the tipping point, so if I earn £1000 over the threshold, then I only see £600. So I'd rather put the £1000 beyond the threshold into my pension where it becomes £1250 in my pension, instead of just £600 in my pocket.

This is a great way to look at it, however you are going to pay tax on those £1250 sooner or later, right? How can we calculate the final benefit so?