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

BattyJ

Marcon 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?

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.

That’s very interesting, thank you.
One question that then brings to mind is that using the ‘scheme pays’ to pay the 40% tax owing, does that count as drawdown in a defined pension scheme and thus reduce the annual allowance from £60000 to £4000? If so it wouldn’t be worth doing……

Sarahspangles

BattyJ said:

Marcon 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?

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.

That’s very interesting, thank you.
One question that then brings to mind is that using the ‘scheme pays’ to pay the 40% tax owing, does that count as drawdown in a defined pension scheme and thus reduce the annual allowance from £60000 to £4000? If so it wouldn’t be worth doing……

No, it’s just a tax arrangement. It’s very widely used in defined benefit schemes e.g. NHS for hospital consultants and GPs.

Marcon

Sarahspangles said:

BattyJ said:

Marcon 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?

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.

That’s very interesting, thank you.
One question that then brings to mind is that using the ‘scheme pays’ to pay the 40% tax owing, does that count as drawdown in a defined pension scheme and thus reduce the annual allowance from £60000 to £4000? If so it wouldn’t be worth doing……

No, it’s just a tax arrangement. It’s very widely used in defined benefit schemes e.g. NHS for hospital consultants and GPs.

I think it's more a cashflow arrangement, to save the individual having to fund the charge themselves out of their own funds. Where the scheme pays it, it does so in exchange for the appropriate reduction in the member's benefits. 

Marcon

BattyJ said:

Marcon 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?

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.

That’s very interesting, thank you.
One question that then brings to mind is that using the ‘scheme pays’ to pay the 40% tax owing, does that count as drawdown in a defined pension scheme and thus reduce the annual allowance from £60000 to £4000? If so it wouldn’t be worth doing……

Are you sure it will only be 40% when added back to your other income? Your marginal rate could surely also be increased when the 'extra' is added on?

kinger101

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.

You pay a tax charge equivalent to the amount of income tax that would have been paid had the income been received.  

I.e , pay in 61,000 and you'll get a 400 tax charge.

It can make sense, especially if it stops you losing tax free childcare and nursery hours.

Can also make sense if you'll be BR taxpayer in retirement as the dual taxation rate is 52 percent rather than 60.

MetaPhysical

BattyJ said:

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.

62% actually - nigh on two thirds.  I have GP and solicitor friends cutting back their hours to avoid it.  Do a Locum shift to earn £500 and take home after stealth tax and student loan £120.  Not worth it and they'd rather go out on their bike.    It's madness that this tax rate still prevails.

BattyJ

MetaPhysical said:

BattyJ said:

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.

62% actually - nigh on two thirds.  I have GP and solicitor friends cutting back their hours to avoid it.  Do a Locum shift to earn £500 and take home after stealth tax and student loan £120.  Not worth it and they'd rather go out on their bike.    It's madness that this tax rate still prevails.

Yes it is 62% but I was ignoring the 2% NI to keep the figures simple.

Zerforax

BattyJ said:

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

Are you sure you will be in the lower tax band when you withdraw from pension? Do you mean the 20% tax band or the 40% tax band? While you might pay 60-62% on the income between 100-125k, if you're earning like 175k you can think of it as more of an average rate of 60% on 25k and 45% on 50k so then the "average tax" drops below the 60%.

If you end up paying 40% income tax when withdrawing the pension then effectively you are deferring the payment of tax for a long period to just save from 45-50% tax today and paying 40% in the future.

Hard to know what the pension rules will look like in the future so you might be better off taking the income now and putting in ISAs. At least you have more control over that and can also access if needed instead of locked away until you are 58+.