Earnings or Pension

shul558127

Hello my husband is 51, his annual earnings are now into the higher tax bracket, at the moment not by much approx £400, is he better off putting all of that into his pension than taking it as earnings, will he pay less in pension tax than earnings tax, hope that makes sense. Many thanks 😊 

Dazed_and_C0nfused

shul558127 said:

Hello my husband is 51, his annual earnings are now into the higher tax bracket, at the moment not by much approx £400, is he better off putting all of that into his pension than taking it as earnings, will he pay less in pension tax than earnings tax, hope that makes sense. Many thanks 😊 

Possibly yes.

It could be 40% tax now or 15% in the future (really 20% but he can usually have 25%TFLS first as well).

artyboy

shul558127 said:

Hello my husband is 51, his annual earnings are now into the higher tax bracket, at the moment not by much approx £400, is he better off putting all of that into his pension than taking it as earnings, will he pay less in pension tax than earnings tax, hope that makes sense. Many thanks 😊 

YES, pension is the better option unless both of the following apply to him:

- he expects to be taking a big enough pension that he'll be paying 40% tax on withdrawals
- he has a sufficiently large pension pot that he has exceeded (or will expect to exceed) the tax free cash limit of ~£268k

Doonhamer

Just check his pensionable earnings if he's only £400 over gross, remember he will pay some pension already so deduct that from the gross pay and he may still be a basic rate payer.

shul558127

Doonhamer said:

Just check his pensionable earnings if he's only £400 over gross, remember he will pay some pension already so deduct that from the gross pay and he may still be a basic rate payer.

Hadn't considered that thankyou, so income tax is applied on the amount after pension contributions/deductions, and if that is under 50k he will still be on the lower rate, have I got that right? Thanks again

Dazed_and_C0nfused

shul558127 said:

Doonhamer said:

Just check his pensionable earnings if he's only £400 over gross, remember he will pay some pension already so deduct that from the gross pay and he may still be a basic rate payer.

Hadn't considered that thankyou, so income tax is applied on the amount after pension contributions/deductions, and if that is under 50k he will still be on the lower rate, have I got that right? Thanks again

It's not quite that simple, although the end result is the same.

You need to know the method(s) used to make the pension contributions.

Net pay = these reduce his income for tax purposes so say salary £55,000 and 10% net pay contribution then as far as HMRC are concerned he has only earned £49,500

Relief at source (RAS) = no reduction in income but the gross RAS contribution increases his basic rate band so say £4,000 from him becomes £5,000 in his pension with the tax relief added on and his basic rate band jumps from £37,700 to £42,700.

shul558127

Thankyou very much, how do we find out if contributions are net or ras? 

Dazed_and_C0nfused

shul558127 said:

Thankyou very much, how do we find out if contributions are net or ras? 

With net pay his payslip should show a marked difference between his taxable pay and salary/pay for NI purposes

With RAS he will be getting 25% of his contribution added in tax relief, this will be seen in his pension account (it's 20% of the gross value).

QrizB

shul558127 said:

Thankyou very much, how do we find out if contributions are net or ras? 

It might say on his payslip, or on his pension statements?

Although, if you can spare £400 you might just want to pay it into his pension anyway. Very few people ever complain that they've saved too much for their retirement.

On-the-coast

If he has his march payslip (& he’s paid monthly) then “total taxable earnings” field on the payslip is the easiest way to find out if he’s above or below 50k for the tax year. 

Practically speaking, any additional pension contrib in this tax year is going to have to be made direct rather than through payroll. 

Any non-payroll earnings (bank interest, rent etc etc?)

artyboy

QrizB said:

shul558127 said:

Thankyou very much, how do we find out if contributions are net or ras? 

It might say on his payslip, or on his pension statements?

Although, if you can spare £400 you might just want to pay it into his pension anyway. Very few people ever complain that they've saved too much for their retirement.

Happy to be a contrarian on that last point. But I'll spare you the rehash of my IHT gripes...