Inheritance and Pension

vacheron

So assuming that you worked 37 hours per week, the minimum wage at the current £12.21 per hour would be £23,556. You could therefore salary sacrifice £36,444 from your £60k salary without going below this permitted threshold.

But, because you can receive tax relief on a total of £47,430 of earned income, this would leave you with £10,986 which you could invest in your other pension without using salary sacrifice, all of which would be eligible for tax relief.

However, as the £60,000 pension annual allowance includes employer contributions, if you are planning to contribute your full £47,430 gross salary, your total employer contributions from your salary sacrifice contribution must not exceed £12,570.

vacheron

So a quick and dirty calculation for the tax alone (ignoring NI and employer contributions for now) is that a £60K salary would pay about £11.5K in tax, so you would have taken home £35,930 of from your £47,430 of taxable income.

This is equivalent to a 32% uplift when put in your pension rather than using that taxed income to pay down a 4% mortgage.

This means that even with a 5% mortgage rate, you could delay paying the the mortgage off for 6 years and still be just about better off (even assuming markets do not increase at all during that time), if they were also to grow by 5% per year, you would actually be 32% better off even after 6 years of mortgage interest*!


* Obvious caveat of investments can go down as well as up! 

QrizB

vacheron said:

• If you earn 60K PA you can't carry forward any previous year's contributions as your would need more than £60K of earned income in this tax year to be allowed to do so. So this leaves you with the standard £60,000 annual allowance limit for 2025-26.

That's £60k of tax-relievable employee contributions. Employer contributions (including salsac) aren't tax-relievable so are on top of that £60k.

vacheron said:

• There is also no point in making pension contributions below your personal allowance (£12,570 assuming basic rate), as there is no tax relief to be gained below this, so that gives you £47,430 you can contribute to your pension that would receive tax relief each year.

You can receive RAS tax relief on contributions that you haven't paid tax on, even the bottom £12570.

vacheron

QrizB said:

vacheron said:

• If you earn 60K PA you can't carry forward any previous year's contributions as your would need more than £60K of earned income in this tax year to be allowed to do so. So this leaves you with the standard £60,000 annual allowance limit for 2025-26.

That's £60k of tax-relievable employee contributions. Employer contributions (including salsac) aren't tax-relievable so are on top of that £60k.

vacheron said:

• There is also no point in making pension contributions below your personal allowance (£12,570 assuming basic rate), as there is no tax relief to be gained below this, so that gives you £47,430 you can contribute to your pension that would receive tax relief each year.

You can receive RAS tax relief on contributions that you haven't paid tax on, even the bottom £12570.

Thanks for the corrections, I was aware of the £3,660 for non-earners but didn’t realise that earners could contribute their entire personal allowance and still receive the 20% RAS on the whole amount! 😳

I might need to have a chat with my wife! 😂😂😂

GenX0212

Jumping on this as I am in a similar situation and not sure this angle has been covered in previous posts. I'm not sure if the OP clarified whether they were earning above the £60k threshold for carry forward?

I'm currently paying approx £48k a year (FY26) into employer pension scheme from combination of salary and bonus sacrificing and AVC's.
Remaining taxable pay of £65k meaning above threshold for using carry forwards. Previous years contributions roughly £46k (FY25), £39k (FY24), £35k (FY23).

If I further increased my AVCs then I would push myself below the £60k threshold but if I paid separately into a SIPP I could pay £12k+£14k+£21k + £5k (£40k allowance limit for 2022-23). Giving an additional total of £42k paid in with £10.5k Relief at Source and a further £10.5k to be clawed back directly from HMRC.

Is that all correct and @kinclad would that approach help you?

Kinclad

Thanks guys, I think I need to have a proper read of the last few posts to ensure I fully understand my options.

Although I used 60k salary as an example (I thought it would make it easier), my actual salary is just over 66k

QrizB

Kinclad said:

Although I used 60k salary as an example (I thought it would make it easier), my actual salary is just over 66k

But you're salsac'ing down to about £20k per year, minimum wage? With the other £46k joining your £7k standard employer contribution as pension contributions, so £53k pa into your pension?

Kinclad

QrizB said:

Kinclad said:

Although I used 60k salary as an example (I thought it would make it easier), my actual salary is just over 66k

But you're salsac'ing down to about £20k per year, minimum wage? With the other £46k joining your £7k standard employer contribution as pension contributions, so £53k pa into your pension?

Yes, based upon my understanding that it makes sense to sacrifice down to minimum wage if you have some additional cash that can supplement that reduced monthly salary and allows you to live month to month.

vacheron

Great watch if you haven't seen it (and have 20 minutes spare) in relation to the "pension vs overpay mortgage" decision before you potentially move on to the specifics of how to get your money into the pension. 

https://www.youtube.com/watch?v=L4sy1f8Q4YA