Personal savings allowance and pension contributions

Crazy_Diamond

I am wondering if I can use pension contributions to increase my personal savings allowance?

This tax year I earned around £4k in interest from savings accounts.  My total earnings were around £19k (including around £4k from the insolvency service in lieu of notice as my employer was liquidated). 

If I contribute £15k to a personal pension will this mean my savings allowance will be £5k?

Dazed_and_C0nfused

Crazy_Diamond said:

I am wondering if I can use pension contributions to increase my personal savings allowance?

This tax year I earned around £4k in interest from savings accounts.  My total earnings were around £19k (including around £4k from the insolvency service in lieu of notice as my employer was liquidated). 

If I contribute £15k to a personal pension will this mean my savings allowance will be £5k?

No, contributions to a personal pension won't help you like that.

Based on what you have posted you are already going to get the full savings nil rate band (aka Personal Savings Allowance) of £1,000.

If you did contribute to a personal pension you would receive basic rate relief on your contribution, so you pay £12k to end up with a gross contribution of £15k in your pension.

But on your income level that will have no impact whatsoever on your taxable income amount or your Personal Allowance or your PSA.  It will increase your basic rate band from £37,700 to £52,709 though.

To be able to use the savings starter band (is that what you really meant?) you would need to reduce your earnings.  You could do that by working less, taking a pay cut or making "net pay" pension contributions.  Or, if your employer offers it sacrificing some salary into your employers pension scheme.  But NMW rules might scupper that option.

Crazy_Diamond

Thank you.  Yes I meant the savings starter band.  I found this article https://www.moneysavingexpert.com/savings/tax-free-savings/ Is the £18750 income then based on gross earned income rather than net?  From what you are saying I assume I can only use a pension to reduce it if it is salary sacrifice?

Dazed_and_C0nfused

Crazy_Diamond said:

Thank you.  Yes I meant the savings starter band.  I found this article https://www.moneysavingexpert.com/savings/tax-free-savings/ Is the £18750 income then based on gross earned income rather than net?  From what you are saying I assume I can only use a pension to reduce it if it is salary sacrifice?

No, you can use "net pay" if your employer uses it.  Net pay is very similar to salary sacrifice but they are your contributions so have no NI savings. 

Salary sacrifice is you saying I don't want £x salary, so you avoid paying tax and NI as you no longer have that as income.  In return your employer pays £x into your pension.  As it is an employer contribution you don't receive any pension tax relief on it.

The savings starter rate band is calculated using details of your taxable non savings non dividend income.  So if your "salary" is £20k and you sacrifice £5k your taxable earnings, the amount going on your P60, is just £15k.

Same with net pay, salary £20k and net pay contributions £5k = taxable pay £15k

Paying until a relief at source pension (like a personal pension) would not change your taxable income so salary £20k and just RAS pension contributions = taxable pay £20k.