Bigger pension and tax

consumers_revenge

Hi,

So I'm about to join a new company (yay) and the salary now puts me at the start of the 40% tax bracket (56K).

I was going to do AVC's as its salary sacrifice and I'm allowed to put in what I want (no debts). I read somewhere about a bigger tax relief at 40% but A) dont really understand it tbh and you need to start talking to/claim vi SS from HMRC which from past experience has never been fun.

My thinking was just keep adding enough % to the AVC that salary wise I fall only into the 20% (hope this makes sense) to keep it very nice and easy. Is this efficient or am I losing out on anything?

Thanks.

DRS1

It is salary sacrifice not self sacrifice (freudian slip?)

If you use salary sacrifice you don't have to claim anything from HMRC you automatically get the benefit of paying less tax because you have less salary.

DRS1

and yes tailoring the contributions to get you down to 20% is perfectly sensible.  You could also consider how much pension you are actually going to need and are you paying enough to get there?

Cobbler_tone

Remember to allow for any other potential taxable benefits, healthcare, car etc. Then allow for any other salary sacrifice, annual leave purchase, share scheme etc. Then any other taxable income, overtime, bonuses, rental income, second income etc.

You just have to target your total taxable income below the 40% of £50,271 and you won't pay 40% tax. Salary sacrifice normally makes it very easy to work out.

dunstonh

My thinking was just keep adding enough % to the AVC that salary wise I fall only into the 20% (hope this makes sense) to keep it very nice and easy. Is this efficient or am I losing out on anything?

Whilst the AVC gives you an NI advantage, what is the quality of the AVC vs an individual scheme?  
Does the AVC link up to the main scheme in any way, or restricted to scheme age of the main scheme?

A lot of AVCs are a bit out of date as they no longer have to be offered.   So, the product terms may not be ideal.

consumers_revenge

So basically Im going to work for a large pension provider who put in 14% and I'm probably going to increase mine up to 10 or 12% (they normally want 8%)

This seemed the easiest way

dunstonh

consumers_revenge said:

So basically Im going to work for a large pension provider who put in 14% and I'm probably going to increase mine up to 10 or 12% (they normally want 8%)

This seemed the easiest way

So, does that mean there is no AVC involved and its just you deciding to pay more in than the default? 
(an AVC is an actual pension product used with defined benefit schemes.  It isn't used with Defined contribution schemes).

It makes it a lot easier if an AVC is not involved.

consumers_revenge

My terminology may be wrong (it seemed to align when others have talked about it)

So yes I can increase the standard 8% I pay in up to whatever point stops me hitting the 40% bracket. Its not a final salary scheme.

It just seemed very easy and I wondered if there was anything I was missing?

El_Torro

dunstonh said:

consumers_revenge said:

So basically Im going to work for a large pension provider who put in 14% and I'm probably going to increase mine up to 10 or 12% (they normally want 8%)

This seemed the easiest way

So, does that mean there is no AVC involved and its just you deciding to pay more in than the default? 
(an AVC is an actual pension product used with defined benefit schemes.  It isn't used with Defined contribution schemes).

It makes it a lot easier if an AVC is not involved.

Just on a side note: I pay into my employer's pension scheme through salary sacrifice, it's a DC scheme. On my payslip it states two separate contributions: Pension SalSac for the minimum required to be in the scheme and Pension AVC for the contributions above the minimum. Both contributions go into the same pot.

AVC might not be the right terminology but there are employers out there that use it for DC schemes.

Dazed_and_C0nfused

consumers_revenge said:

My terminology may be wrong (it seemed to align when others have talked about it)

So yes I can increase the standard 8% I pay in up to whatever point stops me hitting the 40% bracket. Its not a final salary scheme.

It just seemed very easy and I wondered if there was anything I was missing?

Salary sacrifice actually means you are contributing anything to the pension.  You are agreeing to a reduced salary in return for additional employer contributions.

You aren't entitled to any tax relief on employer contributions, for example £500 sacrificed is £500 in your pension, not £500 plus basic rate tax relief.

But you avoid paying tax and NI on that £500.  And you don't need to involve HMRC at all as you aren't contributing to the pension, you are simply avoiding paying tax on the salary you have sacrificed.

Depending on how you structure things the usual tax/NI saving is either 42% (40% tax and 2% NI) or 28% (20% tax and 8% NI).

dunstonh

My terminology may be wrong (it seemed to align when others have talked about it)

Probably for historic reasons.  Before 2001, if you were in an occupational pension, you couldn't pay into a personal pension.  If you wanted to pay more, it had to go into the main scheme or you had to use AVC or FSAVC.    In 2006, FSAVCs were abolished and AVCs no longer had to be issued by companies if they didn't want to.

Like many things in life, sometimes people hold onto old terminology and it gains a new use.