Tax Relief Payments - Workplace Pension

bilko89

Hi everyone. I'm new to trying to understand my pension, which at 35, I'm ashamed to say! I'm trying to work out what my number needs to be at the moment so factoring in how much I need to contribute from now until retirement. 

Looking at my pension providers website, it shows me the contributions to my fund, Mines, my employers and the tax relief that is paid in. Currently I pay the default 4%, Tax Relief 1% and employer 3%.

My question relates to the tax relief payments. I assume this will increase if I increase my contribution. Currently I pay £95.87 and my tax relief is 23.97. As Martin says, this works out at 4% and 1% but if I increase my contribution, how do I work out my tax relief?

lisyloo

Income tax is 20%.
So from your total of 119.84, the tax is 20% (=23.97)

If you want to work it out from your net figure then it's 25%
i.e 23.97 is 25% of 95.87

Do you know if your company use salary sacrifice?
If they do then you will also saving 8% in national insurance.

or is this one you pay into yourself?

bilko89

Thanks @lisyloo should have realised that....

I don't think so, my salary is £35K per year/£2916.67 per month. my contribution plus tax relief would be £145.83. Currently my pension contribution is shown on my payslip @ £95.87 per month (plus tax relief which I found the figure for on pension website).

The figures just don't seem to add up for me. It may be because I live in Scotland and the tax deductions are a bit more complicated up here.

Dazed_and_C0nfused

bilko89 said:

Thanks @lisyloo should have realised that....

I don't think so, my salary is £35K per year/£2916.67 per month. my contribution plus tax relief would be £145.83. Currently my pension contribution is shown on my payslip @ £95.87 per month (plus tax relief which I found the figure for on pension website).

The figures just don't seem to add up for me. It may be because I live in Scotland and the tax deductions are a bit more complicated up here.

Or more likely your employer is using the earnings threshold to determine how much to contribute.  You can simply increase your % to overcome this.

In your current situation this means the first £6,240 of your earnings are ignored.

So £35,000 less £6,240 = £28,760

£28,760 ÷ 12 = £2,396.66

£2,396.66 x 4% = £95.87 (your net contribution)

https://www.thepensionsregulator.gov.uk/en/employers/new-employers/im-an-employer-who-has-to-provide-a-pension/declare-your-compliance/ongoing-duties-for-employers-/earnings-thresholds

As you are presumably paying some 21% tax then you are likely to be entitled to some additional tax relief from HMRC.  This is a personal tax saving, it doesn't get added to your pension fund.

lisyloo

It sounds like thsi is under the NEST scheme which is the legal minimum

"Qualifying earnings are a range – for the 2024/25 tax year, this is gross earnings between £6,240 and £50,270. You use a worker’s earnings between this range as a basis for calculating contributions."

penners324

lisyloo said:

Income tax is 20%.
So from your total of 119.84, the tax is 20% (=23.97)

If you want to work it out from your net figure then it's 25%
i.e 23.97 is 25% of 95.87

Do you know if your company use salary sacrifice?
If they do then you will also saving 8% in national insurance.

or is this one you pay into yourself?

The pension scheme is adding tax relief so it's not salary sacrifice 

penners324

Your employer is paying the legal minimum of payments.

Pretty poor.

You could open a pension elsewhere to make additional payments. This is likely to have a better range of investment options 

bilko89

Brilliant thanks so much both of you. Makes sense now and I'll now be able to use these figures to plot out what I need to do for the future. Paying this minimum won't get me where i need to be pension wise so work still to be done. I'll ask my employer if they will increase their percentage if I increase mines but I'm almost certain the answer will be no... 

penners324

lisyloo said:

It sounds like thsi is under the NEST scheme which is the legal minimum

"Qualifying earnings are a range – for the 2024/25 tax year, this is gross earnings between £6,240 and £50,270. You use a worker’s earnings between this range as a basis for calculating contributions."

Nest isn't just the minimum. You can do salary sacrifice through them as well.

Plenty of other schemes also allow contributions based on qualifying earnings 

lisyloo

This is very low contributions, especially if you have any plans of retiring early.

I'm in a position to retire at 56 but I put in much more than this.
Obviously you can only put it what you can afford bearing in mind you can't touch it for 23 years, but it's something to consider as and when you get payrises.

bilko89

100% agreed. I'm now looking at my pension and retirement instead of passively allowing myself to march into poverty in retirement!

To be honest I've never thought of retiring early and looking at these figures and projecting a modest ( I think this is right!) 5% per year on investments within this pension fund, I won't have enough even if I work to 68 (possibly higher when I get there).

I have some debt I need to clear first but after this, I'm seriously planning on increasing this to 10% maybe 15% to ensure i have enough in retirement. I have salary increases ahead of course, having just started this job in June last year and currently on a starting salary at the moment (Buyer in Construction) so I'll see where this takes me.

I've changed my investment via my pension providers website to a Retirement 2055 index fund which seems to be a better idea than the default I was in. 

If my employer sticks at the 3%, what else could I look at?