Should I take extra out of my pension in early retirement and pay into S&S ISA?

GenX0212

leosayer said:

Incidentally, I'm having a lot of trouble explaining this concept to a friend who has a large SIPP, various DB pensions that pay £20k pa in total and a small ISA.

In the end I think he gets that all he is doing is shifting money from a taxable pot to a non-taxable pot. 

It does feel a bit counterintuitive. You spend your life building up your pension pot, you know that you are getting 20% or 40% relief paying in and 25% of your pot is tax free when taking it out, all the calculators point you to reducing what you take out in order to preserve the pot, the 4% rule gets quoted to you etc. All contributes to a mindset to put the very most you can into your pension account and to only take out the minimum you want to spend.

Thanks heavens for all the good folk on here helping each other out to be able to maximise tax efficiency 

Dazed_and_C0nfused

Pat38493 said:

Dazed_and_C0nfused said:

Pat38493 said:

Johnnyboy11 said:

You could recycle £2880 (net) back into your pension each year to increase your higher rate income tax threshold. Every little helps.

I was meaning to check this - so this works does it?  I have a DB pension paying about £14K.  Are you saying that if I pay £2880 into a DC pension, I can withdraw £39150 from a DC pension and only pay 20% tax?  Isn't that double counting because I will already receive 20% tax relief back to the SIPP from HMRC?

You could take more than that, you seem to be forgetting that a net contribution of £2,880 into a pension using the relief at source pension method becomes £3,600 with the basic rate tax relief added.

This £3,600 increases your basic rate band from £37,700 to £41,300.

OK - so I just need to tell HMRC that I made the contribution and they will adjust my tax codes?

But there are no HMRC tax codes that “increases the basic rate band”?  The numbers in HMRC tax codes are the tax free amount as far as I know?

Are you saying that if I made a £2880 contribution to a pension and (for example) I have DB pension income of £16170 I won’t pay any tax if I don’t make any DC withdrawals, or do you literally mean that the £12570 says the same but the top end of the basic rate band goes up?

Tax code allowances can be increased to give effect to an increase in basic rate band.

Very simple example, you add £3,600 to a pension using the relief at source method (the £3,600 is inclusive of the basic rate relief the pension company adds, you only paid over £2,880).

Your only taxable income comes from earnings or a pension and is expected to be £55,000.

The gross contribution increases your basic rate band by £3,600, meaning you pay 20% tax on an extra £3,600.  But you avoid paying 40% on that £3,600.  Tax saving is £720.

If HMRC increased your tax code from 1257L to 1437L (extra £1,800 tax code allowances) then your employer or pension payer would deduct £720 less tax.  Giving you the (estimated) additional relief due.

This would be reviewed once the tax year has ended and if HMRC need to send you a tax calculation because you have under or overpaid tax for some reason then you would see a basic rate band of £41,300 rather than £37,700.

There is a form on gov.uk to notify HMRC of relief at source pension contributions if you are due some additional relief over and above the basic rate relief given by the pension company.

For someone with taxable income of £55k (or £16k) none of the above has any impact whatsoever on their Personal Allowance.

If your only income was a pension of £16,170 then a relief at source contrition of £3,600 (gross) would make no difference at all to your personal tax liability.  That would still be £720.  But you would, coincidentally, have received £720 in pension tax relief.

If your earnings or pension was only say £10,000 and that was your only taxable income you could still get the same £720 pension tax relief despite not paying any tax for that tax year.

GenX0212

Dazed_and_C0nfused said:

Pat38493 said:

Dazed_and_C0nfused said:

Pat38493 said:

Johnnyboy11 said:

You could recycle £2880 (net) back into your pension each year to increase your higher rate income tax threshold. Every little helps.

I was meaning to check this - so this works does it?  I have a DB pension paying about £14K.  Are you saying that if I pay £2880 into a DC pension, I can withdraw £39150 from a DC pension and only pay 20% tax?  Isn't that double counting because I will already receive 20% tax relief back to the SIPP from HMRC?

You could take more than that, you seem to be forgetting that a net contribution of £2,880 into a pension using the relief at source pension method becomes £3,600 with the basic rate tax relief added.

This £3,600 increases your basic rate band from £37,700 to £41,300.

OK - so I just need to tell HMRC that I made the contribution and they will adjust my tax codes?

But there are no HMRC tax codes that “increases the basic rate band”?  The numbers in HMRC tax codes are the tax free amount as far as I know?

Are you saying that if I made a £2880 contribution to a pension and (for example) I have DB pension income of £16170 I won’t pay any tax if I don’t make any DC withdrawals, or do you literally mean that the £12570 says the same but the top end of the basic rate band goes up?

Tax code allowances can be increased to give effect to an increase in basic rate band.

Very simple example, you add £3,600 to a pension using the relief at source method (the £3,600 is inclusive of the basic rate relief the pension company adds, you only paid over £2,880).

Your only taxable income comes from earnings or a pension and is expected to be £55,000.

The gross contribution increases your basic rate band by £3,600, meaning you pay 20% tax on an extra £3,600.  But you avoid paying 40% on that £3,600.  Tax saving is £720.

If HMRC increased your tax code from 1257L to 1437L (extra £1,800 tax code allowances) then your employer or pension payer would deduct £720 less tax.  Giving you the (estimated) additional relief due.

There is a form on gov.uk to notify HMRC of relief at source pension contributions if you are due some additional relief over and above the basic rate relief given by the pension company.

For someone with taxable income of £55k (or £16k) none of the above has any impact whatsoever on their Personal Allowance.

If your only income was a pension of £16,170 then a relief at source contrition of £3,600 (gross) would make no difference at all to your personal tax liability.  That would still be £720.  But you would, coincidentally, have received £720 in pension tax relief.

If your earnings or pension was only say £10,000 and that was your only taxable income you could still get the same £720 pension tax relief despite not paying any tax for that tax year.

Lost me slightly as well sorry. If I am receiving £50k then I'm currently just a couple of hundred under the 40% threshold. If I pay £2880 back into my pension and have no other income then I get an extra £720 in tax relief - do I have to notify HMRC in order to realise this?

Dazed_and_C0nfused

GenX0212 said:

Dazed_and_C0nfused said:

Pat38493 said:

Dazed_and_C0nfused said:

Pat38493 said:

Johnnyboy11 said:

You could recycle £2880 (net) back into your pension each year to increase your higher rate income tax threshold. Every little helps.

I was meaning to check this - so this works does it?  I have a DB pension paying about £14K.  Are you saying that if I pay £2880 into a DC pension, I can withdraw £39150 from a DC pension and only pay 20% tax?  Isn't that double counting because I will already receive 20% tax relief back to the SIPP from HMRC?

You could take more than that, you seem to be forgetting that a net contribution of £2,880 into a pension using the relief at source pension method becomes £3,600 with the basic rate tax relief added.

This £3,600 increases your basic rate band from £37,700 to £41,300.

OK - so I just need to tell HMRC that I made the contribution and they will adjust my tax codes?

But there are no HMRC tax codes that “increases the basic rate band”?  The numbers in HMRC tax codes are the tax free amount as far as I know?

Are you saying that if I made a £2880 contribution to a pension and (for example) I have DB pension income of £16170 I won’t pay any tax if I don’t make any DC withdrawals, or do you literally mean that the £12570 says the same but the top end of the basic rate band goes up?

Tax code allowances can be increased to give effect to an increase in basic rate band.

Very simple example, you add £3,600 to a pension using the relief at source method (the £3,600 is inclusive of the basic rate relief the pension company adds, you only paid over £2,880).

Your only taxable income comes from earnings or a pension and is expected to be £55,000.

The gross contribution increases your basic rate band by £3,600, meaning you pay 20% tax on an extra £3,600.  But you avoid paying 40% on that £3,600.  Tax saving is £720.

If HMRC increased your tax code from 1257L to 1437L (extra £1,800 tax code allowances) then your employer or pension payer would deduct £720 less tax.  Giving you the (estimated) additional relief due.

There is a form on gov.uk to notify HMRC of relief at source pension contributions if you are due some additional relief over and above the basic rate relief given by the pension company.

For someone with taxable income of £55k (or £16k) none of the above has any impact whatsoever on their Personal Allowance.

If your only income was a pension of £16,170 then a relief at source contrition of £3,600 (gross) would make no difference at all to your personal tax liability.  That would still be £720.  But you would, coincidentally, have received £720 in pension tax relief.

If your earnings or pension was only say £10,000 and that was your only taxable income you could still get the same £720 pension tax relief despite not paying any tax for that tax year.

Lost me slightly as well sorry. If I am receiving £50k then I'm currently just a couple of hundred under the 40% threshold. If I pay £2880 back into my pension and have no other income then I get an extra £720 in tax relief - do I have to notify HMRC in order to realise this?

No, that will not result in any personal tax saving for you so totally pointless really for you to tell HMRC about the pension contribution.

The pension company will automatically add the £720 pension tax relief to your pension. 

Depending on who your pension is with this will either be when you make the contribution or several weeks later when they receive the cash from HMRC.  But you are not involved in that process, it is entirely between the pension company and HMRC.

Pat38493

Dazed_and_C0nfused said:

Pat38493 said:

Dazed_and_C0nfused said:

Pat38493 said:

Johnnyboy11 said:

You could recycle £2880 (net) back into your pension each year to increase your higher rate income tax threshold. Every little helps.

I was meaning to check this - so this works does it?  I have a DB pension paying about £14K.  Are you saying that if I pay £2880 into a DC pension, I can withdraw £39150 from a DC pension and only pay 20% tax?  Isn't that double counting because I will already receive 20% tax relief back to the SIPP from HMRC?

You could take more than that, you seem to be forgetting that a net contribution of £2,880 into a pension using the relief at source pension method becomes £3,600 with the basic rate tax relief added.

This £3,600 increases your basic rate band from £37,700 to £41,300.

OK - so I just need to tell HMRC that I made the contribution and they will adjust my tax codes?

But there are no HMRC tax codes that “increases the basic rate band”?  The numbers in HMRC tax codes are the tax free amount as far as I know?

Are you saying that if I made a £2880 contribution to a pension and (for example) I have DB pension income of £16170 I won’t pay any tax if I don’t make any DC withdrawals, or do you literally mean that the £12570 says the same but the top end of the basic rate band goes up?

Tax code allowances can be increased to give effect to an increase in basic rate band.

Very simple example, you add £3,600 to a pension using the relief at source method (the £3,600 is inclusive of the basic rate relief the pension company adds, you only paid over £2,880).

Your only taxable income comes from earnings or a pension and is expected to be £55,000.

The gross contribution increases your basic rate band by £3,600, meaning you pay 20% tax on an extra £3,600.  But you avoid paying 40% on that £3,600.  Tax saving is £720.

If HMRC increased your tax code from 1257L to 1437L (extra £1,800 tax code allowances) then your employer or pension payer would deduct £720 less tax.  Giving you the (estimated) additional relief due.

This would be reviewed once the tax year has ended and if HMRC need to send you a tax calculation because you have under or overpaid tax for some reason then you would see a basic rate band of £41,300 rather than £37,700.

There is a form on gov.uk to notify HMRC of relief at source pension contributions if you are due some additional relief over and above the basic rate relief given by the pension company.

For someone with taxable income of £55k (or £16k) none of the above has any impact whatsoever on their Personal Allowance.

If your only income was a pension of £16,170 then a relief at source contrition of £3,600 (gross) would make no difference at all to your personal tax liability.  That would still be £720.  But you would, coincidentally, have received £720 in pension tax relief.

If your earnings or pension was only say £10,000 and that was your only taxable income you could still get the same £720 pension tax relief despite not paying any tax for that tax year.

OK thanks so effectively they would probably adjust upward the number in the tax code and this would usually have the required result.

So in the end, if I ultimately paid 20% tax on 75% of the £3600 on withdrawal in a later year, the ultimate gain to me is the famous £185 or whatever that you get from paying in £2880 as a 20% marginal rate taxpayer.  I am effectively getting 40% tax relief on the contribution but I then have to pay most of it back again when I withdraw the contribution later.

And in the current tax year I am no better off on cash flow because I paid out £2880 and was paid an extra £2880 from the extra £3600 that I took from the drawdown income.  My only ultimate gain is the £185.

Dazed_and_C0nfused

Pat38493 said:

Dazed_and_C0nfused said:

Pat38493 said:

Dazed_and_C0nfused said:

Pat38493 said:

Johnnyboy11 said:

You could recycle £2880 (net) back into your pension each year to increase your higher rate income tax threshold. Every little helps.

I was meaning to check this - so this works does it?  I have a DB pension paying about £14K.  Are you saying that if I pay £2880 into a DC pension, I can withdraw £39150 from a DC pension and only pay 20% tax?  Isn't that double counting because I will already receive 20% tax relief back to the SIPP from HMRC?

You could take more than that, you seem to be forgetting that a net contribution of £2,880 into a pension using the relief at source pension method becomes £3,600 with the basic rate tax relief added.

This £3,600 increases your basic rate band from £37,700 to £41,300.

OK - so I just need to tell HMRC that I made the contribution and they will adjust my tax codes?

But there are no HMRC tax codes that “increases the basic rate band”?  The numbers in HMRC tax codes are the tax free amount as far as I know?

Are you saying that if I made a £2880 contribution to a pension and (for example) I have DB pension income of £16170 I won’t pay any tax if I don’t make any DC withdrawals, or do you literally mean that the £12570 says the same but the top end of the basic rate band goes up?

Tax code allowances can be increased to give effect to an increase in basic rate band.

Very simple example, you add £3,600 to a pension using the relief at source method (the £3,600 is inclusive of the basic rate relief the pension company adds, you only paid over £2,880).

Your only taxable income comes from earnings or a pension and is expected to be £55,000.

The gross contribution increases your basic rate band by £3,600, meaning you pay 20% tax on an extra £3,600.  But you avoid paying 40% on that £3,600.  Tax saving is £720.

If HMRC increased your tax code from 1257L to 1437L (extra £1,800 tax code allowances) then your employer or pension payer would deduct £720 less tax.  Giving you the (estimated) additional relief due.

This would be reviewed once the tax year has ended and if HMRC need to send you a tax calculation because you have under or overpaid tax for some reason then you would see a basic rate band of £41,300 rather than £37,700.

There is a form on gov.uk to notify HMRC of relief at source pension contributions if you are due some additional relief over and above the basic rate relief given by the pension company.

For someone with taxable income of £55k (or £16k) none of the above has any impact whatsoever on their Personal Allowance.

If your only income was a pension of £16,170 then a relief at source contrition of £3,600 (gross) would make no difference at all to your personal tax liability.  That would still be £720.  But you would, coincidentally, have received £720 in pension tax relief.

If your earnings or pension was only say £10,000 and that was your only taxable income you could still get the same £720 pension tax relief despite not paying any tax for that tax year.

OK thanks so effectively they would probably adjust upward the number in the tax code and this would usually have the required result.

So in the end, if I ultimately paid 20% tax on 75% of the £3600, the ultimate gain to me is the famous £185 or whatever that you get from paying in £2880 as a 20% marginal rate taxpayer.  I am effectively getting 40% tax relief on the contribution but I then have to pay most of it back again when I withdraw the contribution later.

And in the current tax year I am no better off on cash flow because I paid out £2880 and was paid an extra £2880 from the extra £3600 that I took from the drawdown income.  My only ultimate gain is the £185.

No idea how you arrive at that conclusion 🤔

Your pension fund of £3,600 has really only cost you £2,160.  The £2,880 you pay up front less £720 personal tax saving.

When you subsequently withdraw the £3,600 as a basic rate payer you will ultimately end up with £3,060 (£900 TFLS + £2,160 post basic rate tax pension income).

So a £900 profit, not £180 (or £185).  All subject to tax rates not changing, LSA not being an issue, pension company fees etc etc.

Pat38493

Dazed_and_C0nfused said:

Pat38493 said:

Dazed_and_C0nfused said:

Pat38493 said:

Dazed_and_C0nfused said:

Pat38493 said:

Johnnyboy11 said:

You could recycle £2880 (net) back into your pension each year to increase your higher rate income tax threshold. Every little helps.

I was meaning to check this - so this works does it?  I have a DB pension paying about £14K.  Are you saying that if I pay £2880 into a DC pension, I can withdraw £39150 from a DC pension and only pay 20% tax?  Isn't that double counting because I will already receive 20% tax relief back to the SIPP from HMRC?

You could take more than that, you seem to be forgetting that a net contribution of £2,880 into a pension using the relief at source pension method becomes £3,600 with the basic rate tax relief added.

This £3,600 increases your basic rate band from £37,700 to £41,300.

OK - so I just need to tell HMRC that I made the contribution and they will adjust my tax codes?

But there are no HMRC tax codes that “increases the basic rate band”?  The numbers in HMRC tax codes are the tax free amount as far as I know?

Are you saying that if I made a £2880 contribution to a pension and (for example) I have DB pension income of £16170 I won’t pay any tax if I don’t make any DC withdrawals, or do you literally mean that the £12570 says the same but the top end of the basic rate band goes up?

Tax code allowances can be increased to give effect to an increase in basic rate band.

Very simple example, you add £3,600 to a pension using the relief at source method (the £3,600 is inclusive of the basic rate relief the pension company adds, you only paid over £2,880).

Your only taxable income comes from earnings or a pension and is expected to be £55,000.

The gross contribution increases your basic rate band by £3,600, meaning you pay 20% tax on an extra £3,600.  But you avoid paying 40% on that £3,600.  Tax saving is £720.

If HMRC increased your tax code from 1257L to 1437L (extra £1,800 tax code allowances) then your employer or pension payer would deduct £720 less tax.  Giving you the (estimated) additional relief due.

This would be reviewed once the tax year has ended and if HMRC need to send you a tax calculation because you have under or overpaid tax for some reason then you would see a basic rate band of £41,300 rather than £37,700.

There is a form on gov.uk to notify HMRC of relief at source pension contributions if you are due some additional relief over and above the basic rate relief given by the pension company.

For someone with taxable income of £55k (or £16k) none of the above has any impact whatsoever on their Personal Allowance.

If your only income was a pension of £16,170 then a relief at source contrition of £3,600 (gross) would make no difference at all to your personal tax liability.  That would still be £720.  But you would, coincidentally, have received £720 in pension tax relief.

If your earnings or pension was only say £10,000 and that was your only taxable income you could still get the same £720 pension tax relief despite not paying any tax for that tax year.

OK thanks so effectively they would probably adjust upward the number in the tax code and this would usually have the required result.

So in the end, if I ultimately paid 20% tax on 75% of the £3600, the ultimate gain to me is the famous £185 or whatever that you get from paying in £2880 as a 20% marginal rate taxpayer.  I am effectively getting 40% tax relief on the contribution but I then have to pay most of it back again when I withdraw the contribution later.

And in the current tax year I am no better off on cash flow because I paid out £2880 and was paid an extra £2880 from the extra £3600 that I took from the drawdown income.  My only ultimate gain is the £185.

No idea how you arrive at that conclusion 🤔

Your pension fund of £3,600 has really only cost you £2,160.  The £2,880 you pay up front less £720 personal tax saving.

When you subsequently withdraw the £3,600 as a basic rate payer you will ultimately end up with £3,060 (£900 TFLS + £2,160 post basic rate tax pension income).

So a £900 profit, not £180 (or £185).  All subject to tax rates not changing, LSA not being an issue, pension company fees etc etc.

Probably I am no good at mental arithmetic!

The way I was thinking about it, the £720 personal tax saving is not really a saving as I never had any intention of incurring 40% tax - if I had not made the pension contribution I would have only withdrawn up to the £50270 limit in that year and I would have done similar in the next years i.e. I don't need to pay 40% tax at any time.