Reducing from 40 % tax through workplace pension

Griffithsrg3

Hi, I was hoping that somebody would be able to give me some advise please. I am currently over the 40 % tax bracket, I would like to know how much I would have to pay extra in to my salary sacrifice to bring this down to 20%, and how much would I be short a month on my monthly earnings. I currently earn £47400 then with my benefit in kind (Company car) that’s another £7963 due to doubling with me going over the threshold. I don’t really understand anything like this. My tax code is 266LX. I contacted HMRC and they informed me that this is correct. 

Dazed_and_C0nfused

Griffithsrg3 said:

Hi, I was hoping that somebody would be able to give me some advise please. I am currently over the 40 % tax bracket, I would like to know how much I would have to pay extra in to my salary sacrifice to bring this down to 20%, and how much would I be short a month on my monthly earnings. I currently earn £47400 then with my benefit in kind (Company car) that’s another £7963 due to doubling with me going over the threshold. I don’t really understand anything like this. My tax code is 266LX. I contacted HMRC and they informed me that this is correct. 

No idea what you mean "due to doubling" but if your taxable earnings are £47,400 + £7,963 then that takes you to £55,363. Just over £5k into the higher rate bracket.

Do you have any other taxable income, even if taxed at 0% like smallish amounts of interest and dividends can be?

Is the £47,400 after factoring the salary you have already to give up in return for extra employer pension contributions?

If you hit the sweet spot you can expect £100 sacrificed into your pension to only cost you £58 in lost take home pay.  Quite a good way of boosting your pension 😉.

The 266L tax code is meaningless without the breakdown of how that was arrived at.  There could be literally millions of permutations of how you end up with a 266L code.

Exodi

As above, I don't know what "due to doubling" means.

If your taxable earnings are £55,363 as you suggest, then you're £5093 into the higher rate tax bracket (40% tax on any earnings above £50270).

To remedy this, you could increase your salary sacrifice by ~£424.42 per month (£5,093/12)

Currently you are being paid this £424.42 chunk, losing £169.77 in income tax and £8.49 in NI, resulting in £246.16 in your bank.

By SS'ing this £424.42 you'd receive that in your pension pot, and potentially 0-100% of the employer NI saving (currently 13.8% or £58.57 extra in this example), depending on whatever arrangement you come to.

If we assume you split the employer NI saving down the middle, you'd be trading £246.16 in your pocket for £453.70 in your pension pot.

Griffithsrg3

Thank you for your reply. I was told once you go over the 40% threshold your benifit in kind doubles. I have no other taxable income. 

I’m not sure regarding your comment in your third paragraph. 

If I am roughly 5k over I would have to pay over £400 extra per month is that correct. Which would mean roughly £230 less in my monthly pay. 

Thanks 

Exodi

Griffithsrg3 said:

Thank you for your reply. I was told once you go over the 40% threshold your benifit in kind doubles. I have no other taxable income. 

I’m not sure regarding your comment in your third paragraph. 

If I am roughly 5k over I would have to pay over £400 extra per month is that correct. Which would mean roughly £230 less in my monthly pay. 

Thanks 

I mean it's an interesting way to think about it and it's not necessarily incorrect.

You have a benefit provided by the company that is judged to be worth £7963.

While you're not receiving £7963 in cash, you are taxed in the same way as if you were and it were part of your regular earnings.

If you were a 20% tax payer, you could consider that you pay £1592.60 in tax on it over the year (or £132.72 a month).

If you were a 40% tax payer, you could consider that you pay £3185.20 in tax on it over the year (or £265.43 a month).

The reason I say it's an interesting way to think about it, is because if you considered you were paid your car benefit before your regular pay (as opposed to after as you are here), you could just as easily conclude that once you go over the 40% threshold your tax on your income doubles, but not your car tax.

Salary sacrificing to stay within the basic rate band, doesn't make your car half the cost (or stop your benefit in kind 'doubling') but it does reduce your overall tax liability.

Maybe I'm being pedantic.

And yes, those are about the rough numbers - you would SS an additional ~£420 per month, which would reduce your take home pay by about ~£230.

Albermarle

There is a 'double benefit' though from increasing your SS contributions.
You pay no 40% tax and your pension will get bigger than it would have been !