Reduce tax paid by putting to pension

tracyk23

Hi guys
Asking for a friend - they are a higher tax payer - circa £90k pa. Is there a type of pension that they could pay the maximum into - that will reduce the tax on their pay packet, and not affect the take home pay too much? Ie - pay £2k a month into a pension and pay £2k a month less in tax? 
Thanks in advance

Tucosalamanca

If only it were that simple.... We'd stop paying tax and put it all in pensions if this was possible

tracyk23

Tucosalamanca said:

If only it were that simple.... We'd stop paying tax and put it all in pensions if this was possible

I actually did think it was that simple - I thought it was the only legitimate way these days to reduce tax.

InvesterJones

tracyk23 said:

Tucosalamanca said:

If only it were that simple.... We'd stop paying tax and put it all in pensions if this was possible

I actually did think it was that simple - I thought it was the only legitimate way these days to reduce tax.

You can reduce tax just fine, but what you are suggesting is only possible if the tax rate was a lot higher than 40%

kempiejon

Tucosalamanca said:

If only it were that simple.... We'd stop paying tax and put it all in pensions if this was possible

Why isn't it possible?
The limits on pensions are relevant income, £60k and some carry forward.

Tucosalamanca

kempiejon said:

Tucosalamanca said:

If only it were that simple.... We'd stop paying tax and put it all in pensions if this was possible

Why isn't it possible?
The limits on pensions are relevant income, £60k and some carry forward.

From OP
and not affect the take home pay too much? Ie - pay £2k a month into a pension and pay £2k a month less in tax

kempiejon

Tucosalamanca said:

kempiejon said:

Tucosalamanca said:

If only it were that simple.... We'd stop paying tax and put it all in pensions if this was possible

Why isn't it possible?
The limits on pensions are relevant income, £60k and some carry forward.

From OP
and not affect the take home pay too much? Ie - pay £2k a month into a pension and pay £2k a month less in tax

Gotcha, it is possible to pay it all ones pay into the pension (within the limits) and not pay any tax but it reduces take home pay and there is no 100% tax rate just now.

Sg28

kempiejon said:

Tucosalamanca said:

kempiejon said:

Tucosalamanca said:

If only it were that simple.... We'd stop paying tax and put it all in pensions if this was possible

Why isn't it possible?
The limits on pensions are relevant income, £60k and some carry forward.

From OP
and not affect the take home pay too much? Ie - pay £2k a month into a pension and pay £2k a month less in tax

Gotcha, it is possible to pay it all ones pay into the pension (within the limits) and not pay any tax but it reduces take home pay and there is no 100% tax rate just now.

Theoretically your friend could pay in £60k per year (the maximum) and live on the remaining 30k.
He would then get tax relief on the 60k.

Then once retired take the maximum lump sump and draw an annual pension that keeps him below the 40% tax bracket. 

AlanP_2

tracyk23 said:

Tucosalamanca said:

If only it were that simple.... We'd stop paying tax and put it all in pensions if this was possible

I actually did think it was that simple - I thought it was the only legitimate way these days to reduce tax.

Making additional pension contributions would reduce the overall income tax bill at the end of the day but whether it would affect take home pay would depend on how the contributions were paid.

If they were deducted from salary by the employer and paid into workplace scheme then take home would reduce by the amount contributed and any relevant tax / NI adjustments that occur as a result.

If the contributions were made to a non-workplace scheme e.g. a SIPP from take home pay then income tax due would possibly be recalculated but take home pay would not be affected as it wouldn't go through payroll.

Is your friend looking to reduce his overall tax bill or looking to maximise take take home pay or looking to increase his pension provision?

Clarity on the objective can help us to steer them in the right direction.

tracyk23

AlanP_2 said:

tracyk23 said:

Tucosalamanca said:

If only it were that simple.... We'd stop paying tax and put it all in pensions if this was possible

I actually did think it was that simple - I thought it was the only legitimate way these days to reduce tax.

Making additional pension contributions would reduce the overall income tax bill at the end of the day but whether it would affect take home pay would depend on how the contributions were paid.

If they were deducted from salary by the employer and paid into workplace scheme then take home would reduce by the amount contributed and any relevant tax / NI adjustments that occur as a result.

If the contributions were made to a non-workplace scheme e.g. a SIPP from take home pay then income tax due would possibly be recalculated but take home pay would not be affected as it wouldn't go through payroll.

Is your friend looking to reduce his overall tax bill or looking to maximise take take home pay or looking to increase his pension provision?

Clarity on the objective can help us to steer them in the right direction.

Thanks for this - I shall clarify if he can drop some take home pay. I was running the payroll for him and was astounded at the amount of tax he was paying and thought he could reduce it by putting into some kind of pension. Not sure increasing pension is his main motivation as he is only paying the minimum just now. 

AlanP_2

Does this friend run their own business?

If they do, are they a Ltd Company or sole trader / partnership?


Self employed pension contributions have other wrinkles which can be explored e.g. if Ltd company pension contributions can be made by the company and not the individual with potentially higher tax savings.