Strayed into higher rate band for income tax - inventive ways to get back to basic rate?

fenceposttortoise

After a heck of a challenging year with my current employer, a conversation has occurred that has resulted in a welcome pay rise  I'm happy with the outcome, they're happy I'm sticking around, everyone is winning.

The snag for me is I've been deliberately running my income to stay in the basic rate band for income tax. The reasons for this are many and various, but ultimately nobody likes paying more tax than they have to!

This pay rise puts me firmly in the higher rate band and whilst the additional money is very welcome, my life is budgeted to run at the top of the basic rate band.... 

I'm trying to think of ways I can reduce my PAYE earnings so my P60 reflects an income commensurate with the basic rate band and I can keep as much out of the higher rate band as I can. I'm enrolled in the company pension scheme, administered by NEST, paying minimum contribution. I also have a SIPP that I have not made any contributions to for many years. I'm 53, so still a couple of years before I could access SIPP funds if I had to.

The company I work for are open to inventive and creative ways to help me achieve my objective legally, but I'm not 100% sure what to suggest! 

I've thought about coming off PAYE and re-contracting as a self employed contractor (not ideal). I've thought about upping my NEST contributions, which I plan to do. Could my employer also make contributions to my SIPP? Could I essentially ask my employer to pay me less via PAYE and stuff the extra into my SIPP ad hoc to achieve my objective?

I'm not in danger of reaching the pension contribution cap of £60k.

What else could I look at to bring my P60 earnings down to the top of the lower rate band?

Exodi

fenceposttortoise said:

Could my employer also make contributions to my SIPP? Could I essentially ask my employer to pay me less via PAYE and stuff the extra into my SIPP ad hoc to achieve my objective?

This is called salary sacrifice and is generally the main way employees can reduce their taxable income. The company also saves on employer NI (and many pass on or share this saving).

Is that an option with your employer?

It will be the main suggestion from anyone here.

Mark_d

I don't see why your employers couldn't pay directly into your SIPP but salary sacrifice is the best way to reduce tax/NI liability.

ColdIron

fenceposttortoise said:

I've thought about upping my NEST contributions, which I plan to do

This is the easiest thing to do and, if your employer offered salary sacrifice, probably the best as you and they save on NI

Could my employer also make contributions to my SIPP? Could I essentially ask my employer to pay me less via PAYE and stuff the extra into my SIPP ad hoc to achieve my objective?

This is salary sacrifice but the snag is that most employers will only use their usual pension provider (Nest in your case) as otherwise it could be an administrative nightmare for them

The other way is simply to pay into your SIPP yourself after tax and get 20% relief directly. You would declare your gross contribution to HMRC and they would effectively raise the 40% threshold above £50,270 to cover the remainder of the tax paid (the higher rate bit)

Albermarle

I also have a SIPP that I have not made any contributions to for many years

I'm enrolled in the company pension scheme, administered by NEST, paying minimum contribution.

Apart from the usefulness of pension contributions with tax relief, I suspect from your comments above that your pension provision is probably inadequate anyway. So probably something to work on in the next 10 years.

 I'm 53, so still a couple of years before I could access SIPP funds if I had to.

Why would you want to access funds at 55, when they will have to last you maybe another 30 years?

poseidon1

Albermarle said:

I also have a SIPP that I have not made any contributions to for many years

I'm enrolled in the company pension scheme, administered by NEST, paying minimum contribution.

Apart from the usefulness of pension contributions with tax relief, I suspect from your comments above that your pension provision is probably inadequate anyway. So probably something to work on in the next 10 years.

 I'm 53, so still a couple of years before I could access SIPP funds if I had to.

Why would you want to access funds at 55, when they will have to last you maybe another 30 years?

Agree, OP does seem to have distinctly odd priorities here.

 Improving pension prospects after securing a decent pay rise, would be the top of my list of financial objectives, rather than looking for varied alternative means to  reduce tax for the sake of it. Each to their own I suppose.

oliel

i am in this situation basically my employer pays my up to the basic tax rate limit and the remainder of my pay goes directly into nest - i am considerably better off that way long term - only catch is i would of like to have been able to take the tax free lump sum from nest but understand you have to transfer out of nest and close your nest pension completely to do that.  It can be restarted i believe.

fenceposttortoise

I have other assets that are designed to adequately pay my pension in old age, hence can be flexible with the use of my SIPP. If I've got it right I shouldn't technically need to save for a pension right now and it's more about minimising my tax liability and staying as close to the top of the basic rate band as I can....

I think I'm right in thinking that if I pay into my SIPP from taxed earnings, my declared P60 earnings will be higher than if I paid into the SIPP under salary sacrifice? Part of the objective for me is to keep my P60 earnings as low as practical.

So is the only answer so far to increase payments to NEST and pay into SIPP via salary sacrifice? 

Anything more creative?

DRS1

fenceposttortoise said:

I have other assets that are designed to adequately pay my pension in old age, hence can be flexible with the use of my SIPP. If I've got it right I shouldn't technically need to save for a pension right now and it's more about minimising my tax liability and staying as close to the top of the basic rate band as I can....

I think I'm right in thinking that if I pay into my SIPP from taxed earnings, my declared P60 earnings will be higher than if I paid into the SIPP under salary sacrifice? Part of the objective for me is to keep my P60 earnings as low as practical.

So is the only answer so far to increase payments to NEST and pay into SIPP via salary sacrifice? 

Anything more creative?

You don't need to be more creative.  Just do the salary sacrifice into NEST (why bother with the SIPP if you haven't been using it?)

Salary sacrifice is better than personal contributions from an NIC point of view and if the employer isn't already using it then it should be.

From a purely tax point of view salary sacrifice or personal contributions to the SIPP is just six of one half a dozen of the other.  You get the same end result just different ways.  The direct contribution by you to the SIPP will require a bit of reporting to HMRC by you so the salary sacrifice is "better" for that reason.

Of course you could consider giving the extra money to charity using gift aid but that would not impact your P60 earnings.  I seem to recall there was an employer based method of giving to charity called Payroll Giving.  Maybe you want to suggest that to your employer?

Dazed_and_C0nfused

fenceposttortoise said:

After a heck of a challenging year with my current employer, a conversation has occurred that has resulted in a welcome pay rise  I'm happy with the outcome, they're happy I'm sticking around, everyone is winning.

The snag for me is I've been deliberately running my income to stay in the basic rate band for income tax. The reasons for this are many and various, but ultimately nobody likes paying more tax than they have to!

This pay rise puts me firmly in the higher rate band and whilst the additional money is very welcome, my life is budgeted to run at the top of the basic rate band.... 

I'm trying to think of ways I can reduce my PAYE earnings so my P60 reflects an income commensurate with the basic rate band and I can keep as much out of the higher rate band as I can. I'm enrolled in the company pension scheme, administered by NEST, paying minimum contribution. I also have a SIPP that I have not made any contributions to for many years. I'm 53, so still a couple of years before I could access SIPP funds if I had to.

The company I work for are open to inventive and creative ways to help me achieve my objective legally, but I'm not 100% sure what to suggest! 

I've thought about coming off PAYE and re-contracting as a self employed contractor (not ideal). I've thought about upping my NEST contributions, which I plan to do. Could my employer also make contributions to my SIPP? Could I essentially ask my employer to pay me less via PAYE and stuff the extra into my SIPP ad hoc to achieve my objective?

I'm not in danger of reaching the pension contribution cap of £60k.

What else could I look at to bring my P60 earnings down to the top of the lower rate band?

You probably realise this now but contributing to Nest or a SIPP will not have any impact on your taxable income.

When it comes to pensions, realistically the only way you would achieve that is by agreeing to take a reduced salary in return for additional employer contributions (salary sacrifice).  You won't receive any pension tax relief on those employer contributions but will not have the salary to pay tax or NI on.

Your contributions to Nest or a SIPP will however increase your basic rate band.  Which has the same overall benefit, it's just more hassle for you having to claim any additional relief from HMRC.  Any personal tax savings ultimately benefits you, it doesn't get added to your pension.

Basically, don't get hung on reducing your taxable income, there are other ways of achieving the same outcome.  Salary sacrifice does have the added benefit of avoiding some NI.  And as you aren't contributing to the pension yourself avoids you having to have any involvement with HMRC.

Albermarle

I have other assets that are designed to adequately pay my pension in old age, hence can be flexible with the use of my SIPP. If I've got it right I shouldn't technically need to save for a pension right now and it's more about minimising my tax liability and staying as close to the top of the basic rate band as I can..

However contributing to a pension and getting 40% tax relief, and then when withdrawing it getting 25% tax free and the rest at 20% ( not many pay 40% tax in retirement) means a huge boost courtesy of the Govt.