What order are incomes used for tax code allocation?

Nick_Dr1

I'm thinking of taking a DB pension but also working part time, which still would be eligible for DB pension contributions. The contributions are by salary sacrifice.

My thinking is that to maximise the salsac contributions I can make, I'd want my pension income to be taxed first, so it has the "normal" tax code, so I get all the work income taxed, as the tax free allowance has been used up by the pension income.

Is it possible to max sure HMRC apply tax codes in a specific order, or am I completely barking up the wrong tree?  

dunstonh

Normally, the highest income under PAYE gets the primary tax code.
Smaller incomes may get a secondary code depending on the amount of the highest income.

Aretnap

I think you're barking up the wrong tree. 

You are taxed on your total income, not specific income streams. In other words, the amount of tax you have to pay is determined solely by the total of your pension income plus employment income plus any other income, minus salary sacrifice. 

For convenience HMRC might make monthly PAYE deductions from your pension, or your salary, or a bit of both, but where the deductions come from doesn't change the amount you must pay by the end of the year, or the amount you can salary sacrifice. 

The main limit on the amount you can salary sacrifice is the need to keep your hourly pay above minimum wage (or the £60K annual allowance, but you'd be doing well for that to be an issue with a part time job).

BikingBud

Nick_Dr1 said:

I'm thinking of taking a DB pension but also working part time, which still would be eligible for DB pension contributions. The contributions are by salary sacrifice.

My thinking is that to maximise the salsac contributions I can make, I'd want my pension income to be taxed first, so it has the "normal" tax code, so I get all the work income taxed, as the tax free allowance has been used up by the pension income.

Is it possible to max sure HMRC apply tax codes in a specific order, or am I completely barking up the wrong tree?  

I have one pension with the majority of my tax code, one with a code that has an offset against my primary pension (so no tax payable on that) and work part time with a BR code and try to drive that income down to National Living Wage with the rest going into the company pension.

So yes it should work, although if you are approaching the higher rate threshold, you might need to adjust your estimated income in the HMRC app to get the code adjusted down rather than waiting and seeing where it ends up.

Dazed_and_C0nfused

Nick_Dr1 said:

I'm thinking of taking a DB pension but also working part time, which still would be eligible for DB pension contributions. The contributions are by salary sacrifice.

My thinking is that to maximise the salsac contributions I can make, I'd want my pension income to be taxed first, so it has the "normal" tax code, so I get all the work income taxed, as the tax free allowance has been used up by the pension income.

Is it possible to max sure HMRC apply tax codes in a specific order, or am I completely barking up the wrong tree?  

Ultimately it makes not a jot of difference, you will get the same tax saving irrespective of how your tax code allowances are allocated.

From a PAYE perspective HMRC aren't even interested in these pension contributions as they are employer contributions and you don't get any pension tax relief on them, you just have less income to pay tax and NI on in the first place.

squirrelpie

You can ask HMRC to reallocate codes if you think it would be sensible to allocate codes in a different way, but as already said, it makes no difference to the overall tax bill. It makes sense to use your allowance on constant income sources, and assign BR to a variable income stream.

jimi_man

I’ve been in this situation and it makes no difference whatsoever. I had my tax code applied to my pension and then BR for everything else (l had two other streams of income at one point). I had BR as I didn’t want to pay Higher Rate tax as I was putting everything above that in my pension. 

Nick_Dr1

Ok, thanks. I get that it makes little difference, but in terms of convenience I'd rather have the salary sacrifice at the full 42% for the bit that is higher rate rather than claim some of it back at the end of the year. Just seems neater!

Dazed_and_C0nfused

Nick_Dr1 said:

Ok, thanks. I get that it makes little difference, but in terms of convenience I'd rather have the salary sacrifice at the full 42% for the bit that is higher rate rather than claim some of it back at the end of the year. Just seems neater!

I don't think you have understood this.  There is never anything you can claim back as salary sacrifice means you aren't contributing to the pension. 

You are agreeing to a reduced salary in return for extra employer contributions.  And you are never entitled to pension tax relief with employer contributions.

As others have explained the bit you seem to be missing is that you have less income to be taxed in the first place.  There is nothing more to it than that.

Nick_Dr1

Ok, that is now clear. I think the thing that wasn't clear to me is that I think I AM making extra contributions via salary sacrifice to the pension, which as you say is reducing my salary, so that money was never mine (or at least not visible to HMRC) in the first place. Although I think its me paying it, its actually my employer.
From my point of view then, if the point is to get total income down to the 40% threshold, I just need to make extra salary sacrifice contributions to make the overall taxable income equal to the 40% threshold. Pension + apparent salary = 40% threshold.

Thanks for the comments.