Maximising my salary sacrifice pension pot and higher rate tax

A900ss

My situation is my wife will retire about about three years before I do and get a considerable tax free lump sum as part of her pension payout. I am a higher rate player and can sacrifice £40,000 per year at 40% tax +2% national insurance savings. If I sacrifice £40k, I am still (just) a 40% tax payer. 

So my workings means I can sacrifice £40,000 of my salary into my pension, which after tax and national insurance is £23,200 a year net ‘loss’ from my wage after taxes. 

So my thinking is to make the salary sacrifice of £40k/year and my wife to use her lump sum to cover the £23,200 per year ‘loss’ to our joint budget account.

My theory is we could do that for three years until I retire. Therefore my pension pot will increase by £120,000, 3 x £40,000 (Plus or minus the stock market changes) and the 'cost' to us would be £69,600, 3 x £23,200, plus any investment benefits that capital could have given us. I can then withdraw the £69,600 tax-free as part of my 25% allowance to give that back to my wife.  Net profit excluding stock market changes of over £50k, £120k less the £69,600. 

The above scenario makes financial sense to me unless I am missing something obvious. I’d really appreciate feedback from people who know.

Many thanks. 

Marcon

A900ss said:

My situation is my wife will retire about about three years before I do and get a considerable tax free lump sum as part of her pension payout. I am a higher rate player and can sacrifice £40,000 per year at 40% tax +2% national insurance savings. If I sacrifice £40k, I am still (just) a 40% tax payer. 

Could be worth considering making some personal contributions to bring you back into basic rate tax territory? That would also mean that your wife could consider Marriage Allowance transfer depending on how much income she will have once retired - https://www.gov.uk/marriage-allowance

MX5huggy

Why are you limiting yourself to £40k per year?  If that is an arbitrary limit imposed by your employers then ask them why? But use a SIPP for the extra. 

If the discussion with the wife is made hard by this being “your” pension and her money etc because your normally run separate finances. You could use a separate SIPP from your employers pension so while it would be in your name it would be clearly separate and you could choose the together. You would loose the 2% NI saving but that may be acceptable. 

A900ss

Thanks. 

No issues with ‘mine’ and ‘hers’. We just want to get more joint money. 

I suggested £40k to max the 40% tax but true, if I put more in, we’d still benefit but at 20% (but maybe 8% NI saving). 

Just wanted to check my theory and that I wasn’t missing something. 

Of course, rules may change but I’m working to current rules. 

Thanks. 

Marcon

A900ss said:

Thanks. 

No issues with ‘mine’ and ‘hers’. We just want to get more joint money. 

I suggested £40k to max the 40% tax but true, if I put more in, we’d still benefit but at 20% (but maybe 8% NI saving). 

A900ss said:

My situation is my wife will retire about about three years before I do and get a considerable tax free lump sum as part of her pension payout. I am a higher rate player and can sacrifice £40,000 per year at 40% tax +2% national insurance savings. If I sacrifice £40k, I am still (just) a 40% tax payer. 

Your posts contradict each other, which makes it a bit tricky to answer helpfully!

MX5huggy

A900ss said:

Thanks. 

No issues with ‘mine’ and ‘hers’. We just want to get more joint money. 

I suggested £40k to max the 40% tax but true, if I put more in, we’d still benefit but at 20% (but maybe 8% NI saving). 

Just wanted to check my theory and that I wasn’t missing something. 

Of course, rules may change but I’m working to current rules. 

Thanks. 

So yes don’t stop at the 40% (plus 2% NI). You can salary sacrifice down to the level that means you are still being paid the National Minimum wage and yes you 8% NI on top of the 20% tax saving so still worth doing. Because it is March you’re not going to be able to Salary Sacrifice much if anything extra this tax year. 

So open a SIPP and pay in as much as you can this tax year. National Minimum wage is not relevant to this. The maximum you can pay in is your total salary this tax year if this is more than £60k then you will use some carry forward for previous years. This is a bit complicated easier if you tell us how much you’re paid and how much you have salary sacrificed this tax year. Next tax year salary sacrifice the maximum and pay all the remainder into a SIPP. Repeat if you want. 

A900ss

Marcon said:

A900ss said:

Thanks. 

No issues with ‘mine’ and ‘hers’. We just want to get more joint money. 

I suggested £40k to max the 40% tax but true, if I put more in, we’d still benefit but at 20% (but maybe 8% NI saving). 

A900ss said:

My situation is my wife will retire about about three years before I do and get a considerable tax free lump sum as part of her pension payout. I am a higher rate player and can sacrifice £40,000 per year at 40% tax +2% national insurance savings. If I sacrifice £40k, I am still (just) a 40% tax payer. 

Your posts contradict each other, which makes it a bit tricky to answer helpfully!

I don’t think they do contradict if you’ve read the posts. If I sacrifice £40k, I’m still a 40% taxpayer but only just. 

However, it was suggested I sacrifice more than £40k and if so, that would only be at 20% tax benefit (other than the very small amount that is ‘just’ over the 40% threshold). Thanks. 

Albermarle

40% tax relief is very generous, so just take advantage of it whilst you can.
There are quite a few posters on here who have done something similar in their last few years of working. Usually from savings, but the end result is the same. 

Cobbler_tone

Now I’m over 55 and can afford to I do exactly this…i.e. keep just in the 20% bracket. This year I have paid £5k less in tax than 2023-2024. My plan is to ramp it up some more from April. Just got to get over the next two years to enjoy it!

ali_bear

Yep this is what I was doing, retirement is now approaching fast. 

It is worth pointing out that once your DC fund reaches the old LTA and your TFLS is capped, any more you pay into it will eventually be taxed as income at 20% and quite possibly at 40% anyway. So as with all things there is a balance to be struck between saving for tomorrow and living for today. Remembering that old saying about two things in life being inevitable, and one of those is taxes. 

Dazed_and_C0nfused

A900ss said:

Marcon said:

A900ss said:

Thanks. 

No issues with ‘mine’ and ‘hers’. We just want to get more joint money. 

I suggested £40k to max the 40% tax but true, if I put more in, we’d still benefit but at 20% (but maybe 8% NI saving). 

A900ss said:

My situation is my wife will retire about about three years before I do and get a considerable tax free lump sum as part of her pension payout. I am a higher rate player and can sacrifice £40,000 per year at 40% tax +2% national insurance savings. If I sacrifice £40k, I am still (just) a 40% tax payer. 

Your posts contradict each other, which makes it a bit tricky to answer helpfully!

I don’t think they do contradict if you’ve read the posts. If I sacrifice £40k, I’m still a 40% taxpayer but only just. 

However, it was suggested I sacrifice more than £40k and if so, that would only be at 20% tax benefit (other than the very small amount that is ‘just’ over the 40% threshold). Thanks. 

What @Marcon said is correct, they do contradict each other.