Pension annual allowance and £100,000 - £125000 ‘super tax’ vs salary sacrifice

BattyJ

Hi All

I currently earn over £100k and take full advantage of my annual pension tax allowance of £60,000 in order to keep my salary below £100k. 

I still have a few thousand of headroom before I hit £100k after I have contributed the maximum £60,000. Due to fiscal drag and frozen allowances I am likely to use my remaining headroom and bust the £100k next year. Say for example I am likely to go over by £10,000, would a salary sacrifice of £10,000 reduce me back to £100,000 and thus avoid the huge tax between the £100-125K?

Hope that makes sense?

Dazed_and_C0nfused

BattyJ said:

Hi All

I currently earn over £100k and take full advantage of my annual pension tax allowance of £60,000 in order to keep my salary below £100k. 

I still have a few thousand of headroom before I hit £100k after I have contributed the maximum £60,000. Due to fiscal drag and frozen allowances I am likely to use my remaining headroom and bust the £100k next year. Say for example I am likely to go over by £10,000, would a salary sacrifice of £10,000 reduce me back to £100,000 and thus avoid the huge tax between the £100-125K?

Hope that makes sense?

Do you have any unused annual allowance that would allow that?

In 2025-26 you could look back as far as 2022-23 and from what you've posted 2024-25 looks to be a non starter.

BattyJ

No unfortunately I don’t. 
I pay my tax I just really object to paying the equivalent of around 60% between 100-125K, it is just too much.

DRS1

There is bound to be someone on here who knows what the penalty is for exceeding your Annual Allowance.  Would that actually be less than the 60% you are trying to save?  Or do they say the excess contribution is just not effective to reduce your taxable earnings?

By the by when you say you are contributing the 60K maximum I assume you are including in that 60K any employer contributions?

Of course you could always try gift aiding charitable donations if the pension contributions don't do the trick.

hugheskevi

DRS1 said:

There is bound to be someone on here who knows what the penalty is for exceeding your Annual Allowance.  Would that actually be less than the 60% you are trying to save?  Or do they say the excess contribution is just not effective to reduce your taxable earnings?

For simplicity, assume earnings of £170,000, no other taxable income, a pension contribution of £70,000 and no carry forward available.

This is an Annual Allowance breach of £10,000. The amount of the breach is added to taxable income and charged at marginal rate. Importantly, the Annual Allowance charge does not affect the Personal Allowance taper and so they retain a full Personal Allowance. So this individual receives effective tax relief at 60% on that £10,000 contribution leading to the excess charge, then pays the charge based on a tax rate of 40%.

So on that last £10,000 that caused the breach, it cost them £4,000 of net income to make the contribution, and that led to a £4,000 Annual Allowance charge that can be paid from the pension. So they put £4,000 into the pension and that ended up being £6,000 after tax relief and payment of the Annual Allowance charge. 

If they have Lump Sum Allowance available and are a higher rate taxpayer, when withdrawn they will pay £1,800 of income tax to withdraw that £6,000 so end up slightly ahead despite paying the Annual Allowance charge. Paying basic rate when withdrawn or having access to salary sacrifice would increase the gain.

Marcon

DRS1 said:

There is bound to be someone on here who knows what the penalty is for exceeding your Annual Allowance.  Would that actually be less than the 60% you are trying to save?  Or do they say the excess contribution is just not effective to reduce your taxable earnings?

By the by when you say you are contributing the 60K maximum I assume you are including in that 60K any employer contributions?

Of course you could always try gift aiding charitable donations if the pension contributions don't do the trick.

Any excess not covered by carry forward gets stuck back onto your taxable income (in the tax year in which you exceed the AA) and is taxed at your marginal rate. It may be possible to use 'scheme pays' to avoid having to find the cash to settle the tax yourself.

BattyJ

hugheskevi said:

DRS1 said:

There is bound to be someone on here who knows what the penalty is for exceeding your Annual Allowance.  Would that actually be less than the 60% you are trying to save?  Or do they say the excess contribution is just not effective to reduce your taxable earnings?

For simplicity, assume earnings of £170,000, no other taxable income, a pension contribution of £70,000 and no carry forward available.

This is an Annual Allowance breach of £10,000. The amount of the breach is added to taxable income and charged at marginal rate. Importantly, the Annual Allowance charge does not affect the Personal Allowance taper and so they retain a full Personal Allowance. So this individual receives effective tax relief at 60% on that £10,000 contribution leading to the excess charge, then pays the charge based on a tax rate of 40%.

So on that last £10,000 that caused the breach, it cost them £4,000 of net income to make the contribution, and that led to a £4,000 Annual Allowance charge that can be paid from the pension. So they put £4,000 into the pension and that ended up being £6,000 after tax relief and payment of the Annual Allowance charge. 

If they have Lump Sum Allowance available and are a higher rate taxpayer, when withdrawn they will pay £1,800 of income tax to withdraw that £6,000 so end up slightly ahead despite paying the Annual Allowance charge. Paying basic rate when withdrawn or having access to salary sacrifice would increase the gain.

So for the 10,000 contribution breach i would get taxed at 40%, where if I didn’t breach the allowance I would have been taxed at 60% …. thus saving 20%? Is that correct

hugheskevi

BattyJ said:

hugheskevi said:

DRS1 said:

There is bound to be someone on here who knows what the penalty is for exceeding your Annual Allowance.  Would that actually be less than the 60% you are trying to save?  Or do they say the excess contribution is just not effective to reduce your taxable earnings?

For simplicity, assume earnings of £170,000, no other taxable income, a pension contribution of £70,000 and no carry forward available.

This is an Annual Allowance breach of £10,000. The amount of the breach is added to taxable income and charged at marginal rate. Importantly, the Annual Allowance charge does not affect the Personal Allowance taper and so they retain a full Personal Allowance. So this individual receives effective tax relief at 60% on that £10,000 contribution leading to the excess charge, then pays the charge based on a tax rate of 40%.

So on that last £10,000 that caused the breach, it cost them £4,000 of net income to make the contribution, and that led to a £4,000 Annual Allowance charge that can be paid from the pension. So they put £4,000 into the pension and that ended up being £6,000 after tax relief and payment of the Annual Allowance charge. 

If they have Lump Sum Allowance available and are a higher rate taxpayer, when withdrawn they will pay £1,800 of income tax to withdraw that £6,000 so end up slightly ahead despite paying the Annual Allowance charge. Paying basic rate when withdrawn or having access to salary sacrifice would increase the gain.

So for the 10,000 contribution breach i would get taxed at 40%, where if I didn’t breach the allowance I would have been taxed at 60% …. thus saving 20%? Is that correct

Yes, but remembering that there is further tax to pay when withdrawing the funds from the pension.

BattyJ

hugheskevi said:

BattyJ said:

hugheskevi said:

DRS1 said:

There is bound to be someone on here who knows what the penalty is for exceeding your Annual Allowance.  Would that actually be less than the 60% you are trying to save?  Or do they say the excess contribution is just not effective to reduce your taxable earnings?

For simplicity, assume earnings of £170,000, no other taxable income, a pension contribution of £70,000 and no carry forward available.

This is an Annual Allowance breach of £10,000. The amount of the breach is added to taxable income and charged at marginal rate. Importantly, the Annual Allowance charge does not affect the Personal Allowance taper and so they retain a full Personal Allowance. So this individual receives effective tax relief at 60% on that £10,000 contribution leading to the excess charge, then pays the charge based on a tax rate of 40%.

So on that last £10,000 that caused the breach, it cost them £4,000 of net income to make the contribution, and that led to a £4,000 Annual Allowance charge that can be paid from the pension. So they put £4,000 into the pension and that ended up being £6,000 after tax relief and payment of the Annual Allowance charge. 

If they have Lump Sum Allowance available and are a higher rate taxpayer, when withdrawn they will pay £1,800 of income tax to withdraw that £6,000 so end up slightly ahead despite paying the Annual Allowance charge. Paying basic rate when withdrawn or having access to salary sacrifice would increase the gain.

So for the 10,000 contribution breach i would get taxed at 40%, where if I didn’t breach the allowance I would have been taxed at 60% …. thus saving 20%? Is that correct

Yes, but remembering that there is further tax to pay when withdrawing the funds from the pension.

That’s 20% that’s in my pension, earning money and compounding, as opposed to being lost to HMRC with no gains. When I eventually withdraw funds I will most likely be in a lower tax band. Any tax on the compounded gain on the 20% will give ultimately give me a real return no matter the tax.

Thank you

artyboy

It's actually 62% when you take NI into account. Although apparently 'the rich' need to be taxed even more. 

DRS1

hugheskevi said:

BattyJ said:

hugheskevi said:

DRS1 said:

There is bound to be someone on here who knows what the penalty is for exceeding your Annual Allowance.  Would that actually be less than the 60% you are trying to save?  Or do they say the excess contribution is just not effective to reduce your taxable earnings?

For simplicity, assume earnings of £170,000, no other taxable income, a pension contribution of £70,000 and no carry forward available.

This is an Annual Allowance breach of £10,000. The amount of the breach is added to taxable income and charged at marginal rate. Importantly, the Annual Allowance charge does not affect the Personal Allowance taper and so they retain a full Personal Allowance. So this individual receives effective tax relief at 60% on that £10,000 contribution leading to the excess charge, then pays the charge based on a tax rate of 40%.

So on that last £10,000 that caused the breach, it cost them £4,000 of net income to make the contribution, and that led to a £4,000 Annual Allowance charge that can be paid from the pension. So they put £4,000 into the pension and that ended up being £6,000 after tax relief and payment of the Annual Allowance charge. 

If they have Lump Sum Allowance available and are a higher rate taxpayer, when withdrawn they will pay £1,800 of income tax to withdraw that £6,000 so end up slightly ahead despite paying the Annual Allowance charge. Paying basic rate when withdrawn or having access to salary sacrifice would increase the gain.

So for the 10,000 contribution breach i would get taxed at 40%, where if I didn’t breach the allowance I would have been taxed at 60% …. thus saving 20%? Is that correct

Yes, but remembering that there is further tax to pay when withdrawing the funds from the pension.

Thank you.  That is the bit I didn't know.  I thought it was just the 40% vs 60% trade off.