Paying extra into my pension to save tax?

PenguinForever

Hello,

At the end of September, I’ll be getting a payrise. My pay will be increased from under 50k to above 50k. The payrise is lovely, but it’s not something that I will actually need right now. I stumbled across something that made me think about putting extra money into my workplace pension, would save me in the long run (less tax?)

I have a few little questions about this. 1) Is this correct? 2) My pay will be around 56k, how much would I need to pay into my pension to capitalise on savings tax? 3) do I need to contact my employer or the pension company to do this? 4) is there a limit to how much I can overpay to my pension?

thanks so much for any advice I get!

Cobbler_tone

Easiest way is if you pay by salary sacrifice, i.e. it is taken from your gross pay. Then take into account any other SS such as additional leave purchase. Then add any taxable benefits such as healthcare. Then account for any bonuses or other income. If you just have straight salary it is very easy to work out. Work out your contribution amount (£ or %) to take you under the 40% threshold and change it via the appropriate system. It is a very sensible thing to do if you have net affordability.

bjorn_toby_wilde

In a nutshell 

1. Yes
2. Enough to take your gross pay below £50271
3. Your employer - HR or payroll 
4. You can pay in as much as you like but you’ll only get tax relief on £60,000 or your total earnings, whichever is the lower

If your employer allows salary sacrifice then you will save the NI as well.

Speak to your HR dept or payroll. They deal with these questions every day and should be able to set it up for you.

kimwp

To keep your savings interest allowance of £1000 before tax on savings is due, you need to keep your net adjusted pay under the higher rate threshold (£50270). This includes savings interest (not including savings in ISAs), dividends and other things that I don't know about like company car.

Dazed_and_C0nfused

PenguinForever said:

Hello,

At the end of September, I’ll be getting a payrise. My pay will be increased from under 50k to above 50k. The payrise is lovely, but it’s not something that I will actually need right now. I stumbled across something that made me think about putting extra money into my workplace pension, would save me in the long run (less tax?)

I have a few little questions about this. 1) Is this correct? 2) My pay will be around 56k, how much would I need to pay into my pension to capitalise on savings tax? 3) do I need to contact my employer or the pension company to do this? 4) is there a limit to how much I can overpay to my pension?

thanks so much for any advice I get!

A lot will depend on the level of your existing pension contributions.

It may be "pay" of around £56k doesn't mean you are a higher rate payer if you already contribute enough into a pension.  

But if you will be a higher rate payer then extra contributions can help avoid that.  Exactly how it works will depend on the method (relief at source, net pay or salary sacrifice) you use to get tey money into the pension.

The limits are unlikely to be an issue here unless you wanted to put the whole £56k in 😳

ColdIron

PenguinForever said:

1) Is this correct? 

Yes

2) My pay will be around 56k, how much would I need to pay into my pension to capitalise on savings tax? 

You get tax relief on most contributions but the bit you are interested in is the portion paying 40% tax. Contribute enough gross (your contributions + basic rate relief) to take you down to £50,270 (don't forget savings interest and dividends above their allowances). You may need to claim the higher rate bit from HMRC, easy enough

3) do I need to contact my employer or the pension company to do this? 

Your employer would be the easiest way especially if you are in salary sacrifice but you could send direct to your PensCo if they accept it, or you could open a SIPP

4) is there a limit to how much I can overpay to my pension?

There are 2 limits and you must be within both. 1) Your relevant earnings and 2) the £60,000 annual allowance (includes employer contributions)

If you don't need the money now it's an excellent option. Full tax relief is a generous break and with pensions seen as a low hanging fruit, especially now, there is a lot of merit in making hay while the sun shines

Make a start here
https://www.moneysavingexpert.com/savings/tax-relief-pension-contributions

PenguinForever

Thank you so much guys!
I work for a small company and they do struggle when it comes to thinks ‘out of the norm’ so I doubt they will not be much help if I’m seeking advice lol!

can I just check, let’s say, I work out, I can survive on 47k, so I’d like to put 9k a year extra into my pension, do I simply divide that by 12, and tell my employer I’d like to put £750 a month extra from my wages into my pension? 

I’m still trying to get my head around it all, lol!  

Dazed_and_C0nfused

PenguinForever said:

Thank you so much guys!
I work for a small company and they do struggle when it comes to thinks ‘out of the norm’ so I doubt they will not be much help if I’m seeking advice lol!

can I just check, let’s say, I work out, I can survive on 47k, so I’d like to put 9k a year extra into my pension, do I simply divide that by 12, and tell my employer I’d like to put £750 a month extra from my wages into my pension? 

I’m still trying to get my head around it all, lol!  

You may only need to pay £7,200 (£600/month) to end up with £9,000 in your pension fund.

It all depends on which method your employer uses, net pay or relief at source.

Net pay reduces your taxable income so you would have to pay £9,000 to get £9,000 in your pension.

Relief at source makes no difference to your taxable income but you get 25% added in basic rate tax relief.  So £600 from you is £750 in the pension fund.

PenguinForever

I really appreciate that! I’m not sure why it’s not making complete sense to me! lol, I’ll make my first step in asking the owner of the company if he uses net pay or relief at source for pension 🙏 

Dazed_and_C0nfused

PenguinForever said:

I really appreciate that! I’m not sure why it’s not making complete sense to me! lol, I’ll make my first step in asking the owner of the company if he uses net pay or relief at source for pension 🙏 

You can usually tell from your payslip.

For simplicity say you currently earn £50k and pay 5%.

Net pay means your taxable pay would only be £47,500 and £2,500 goes into your pension.

Relief at source means your taxable pay remains £50k and £2,500 is added to your pension and £625 is added in basic rate relief.  Or sometimes it might be £2,000 goes into your pension with £500 added in basic rate relief (the total being 5%).