Lump Sum Contribution and Immediate Draw Down

banky777

QrizB said:

banky777 said:
If my salary wasn't sacrificed for pension contributions, I'd be over that amount but presumably that doesn't make a difference?

No, that doesn't help you here!

OK. Thanks very much for your help.

Having had confirmation from Standard Life that I wouldn't be breaking any rules by doing this, I might still pay in a lesser amount which ensures I'm still treated as a higher rate tax payer.

Thanks again.

Dazed_and_C0nfused

banky777 said:

QrizB said:

For someone in England and Wales who isn't making RAS pension contributions, their earnings from £12570 to £50270 will be taxed at 20%. Earnings above that up to £125240 are taxed at 40% (although complications come in at £100k).

If you make a £30k net contribution to a RAS pension scheme, the £37.5k gross pension contribution increases your 20% band by that amount. So you'll be paying 20% tax on earnings up to £87770.

If you're earning less than £87770, you won't have any income that can take advantage of this increase in your tax band.

So for example if your taxable earnings were £51000, you'd only gain from paying 20% rather than 40% on the £770 above £50270.

Ah OK, I understand. Thanks.

If I earn even a pound over £87770, I would gain from the higher rate, but otherwise, not.

If my salary wasn't sacrificed for pension contributions, I'd be over that amount but presumably that doesn't make a difference?

I'm not sure you have understood this.

Without the gross RAS contribution of £37,500 you would be paying 40% tax on income above £50,270.  With the RAS contribution of £37,500 you would be paying 20% on the earnings from £50,270 to £87,770.  Saving you £7,500 in tax.

You have also previously referred to £45k but doing this is never going to get £45k into your pension.  If you pay £30k using the relief at source method i.e. personal contributions to a SIPP or personal pension, the pension company will add £7.5k in basic rate relief, giving you a pension fund of £37.5k.

There may then be a personal tax saving for you but that doesn't get added to your pension fund, it benefits you personally. 

So irrespective of being a higher rate payer or not you won't ever get more than £37.5k into your pension if you only hand over £30k to start with.

DRS1

I think the idea was he'd contribute the other £7.5k to the pension

banky777

DRS1 said:

I think the idea was he'd contribute the other £7.5k to the pension

Yes, that was the idea. Thanks.

banky777

Dazed_and_C0nfused said:

banky777 said:

QrizB said:

For someone in England and Wales who isn't making RAS pension contributions, their earnings from £12570 to £50270 will be taxed at 20%. Earnings above that up to £125240 are taxed at 40% (although complications come in at £100k).

If you make a £30k net contribution to a RAS pension scheme, the £37.5k gross pension contribution increases your 20% band by that amount. So you'll be paying 20% tax on earnings up to £87770.

If you're earning less than £87770, you won't have any income that can take advantage of this increase in your tax band.

So for example if your taxable earnings were £51000, you'd only gain from paying 20% rather than 40% on the £770 above £50270.

Ah OK, I understand. Thanks.

If I earn even a pound over £87770, I would gain from the higher rate, but otherwise, not.

If my salary wasn't sacrificed for pension contributions, I'd be over that amount but presumably that doesn't make a difference?

I'm not sure you have understood this.

Without the gross RAS contribution of £37,500 you would be paying 40% tax on income above £50,270.  With the RAS contribution of £37,500 you would be paying 20% on the earnings from £50,270 to £87,770.  Saving you £7,500 in tax.

You have also previously referred to £45k but doing this is never going to get £45k into your pension.  If you pay £30k using the relief at source method i.e. personal contributions to a SIPP or personal pension, the pension company will add £7.5k in basic rate relief, giving you a pension fund of £37.5k.

There may then be a personal tax saving for you but that doesn't get added to your pension fund, it benefits you personally. 

So irrespective of being a higher rate payer or not you won't ever get more than £37.5k into your pension if you only hand over £30k to start with.

Thanks again for taking time to reply.

The intention would be to pay any rebate from higher rate relief into my pension as well as the original £30K. The rebate may not be the full £7.5K, but I'm trying to understand if I will, at least, receive a proportion of that when I complete my tax return at the end of the year. I've tried putting some figures into Copilot but I'm still not sure I understand it!

My gross salary (after salary sacrifice pension contributions) will be around £82K so, aside from the one-off contribution, I'm currently paying tax at 40%. If I understand correctly, you're saying that making a gross, one-off contribution to my pension of £37.5K would extend my basic rate band beyond my annual earnings so I would no longer be classed as a higher rate tax payer for calculation purposes and therefore not qualify for higher rate relief. But surely, if I'm currently paying tax at the higher rate, there would be some rebate due because I would've overpaid tax at the end of the year.

Am I right?

QrizB

banky777 said:

Am I right?

Yes.

With an expected gross taxable salary (after salsac) of £82k, you have £31730 of income that is potentially taxable at 40%.

A relief-at-source pension contribution of £25384 would receive RAS relief of £6346 and increase your basic rate tax band to £82k, so you would not be paying 40% tax on any of your income.

Larger RAS contributions would still receive RAS relief but would not have any effect on the amount of income tax you pay.

Dazed_and_C0nfused

banky777 said:

Dazed_and_C0nfused said:

banky777 said:

QrizB said:

For someone in England and Wales who isn't making RAS pension contributions, their earnings from £12570 to £50270 will be taxed at 20%. Earnings above that up to £125240 are taxed at 40% (although complications come in at £100k).

If you make a £30k net contribution to a RAS pension scheme, the £37.5k gross pension contribution increases your 20% band by that amount. So you'll be paying 20% tax on earnings up to £87770.

If you're earning less than £87770, you won't have any income that can take advantage of this increase in your tax band.

So for example if your taxable earnings were £51000, you'd only gain from paying 20% rather than 40% on the £770 above £50270.

Ah OK, I understand. Thanks.

If I earn even a pound over £87770, I would gain from the higher rate, but otherwise, not.

If my salary wasn't sacrificed for pension contributions, I'd be over that amount but presumably that doesn't make a difference?

I'm not sure you have understood this.

Without the gross RAS contribution of £37,500 you would be paying 40% tax on income above £50,270.  With the RAS contribution of £37,500 you would be paying 20% on the earnings from £50,270 to £87,770.  Saving you £7,500 in tax.

You have also previously referred to £45k but doing this is never going to get £45k into your pension.  If you pay £30k using the relief at source method i.e. personal contributions to a SIPP or personal pension, the pension company will add £7.5k in basic rate relief, giving you a pension fund of £37.5k.

There may then be a personal tax saving for you but that doesn't get added to your pension fund, it benefits you personally. 

So irrespective of being a higher rate payer or not you won't ever get more than £37.5k into your pension if you only hand over £30k to start with.

Thanks again for taking time to reply.

The intention would be to pay any rebate from higher rate relief into my pension as well as the original £30K. The rebate may not be the full £7.5K, but I'm trying to understand if I will, at least, receive a proportion of that when I complete my tax return at the end of the year. I've tried putting some figures into Copilot but I'm still not sure I understand it!

My gross salary (after salary sacrifice pension contributions) will be around £82K so, aside from the one-off contribution, I'm currently paying tax at 40%. If I understand correctly, you're saying that making a gross, one-off contribution to my pension of £37.5K would extend my basic rate band beyond my annual earnings so I would no longer be classed as a higher rate tax payer for calculation purposes and therefore not qualify for higher rate relief. But surely, if I'm currently paying tax at the higher rate, there would be some rebate due because I would've overpaid tax at the end of the year.

Am I right?

Can you clarify what exactly you mean by the bit in bold 🤔

Do you think you will receive some higher rate relief, just not on the whole of the £37.5k

Or do you think adding £37.5k will mean you won't be entitled to any higher rate tax relief?

banky777

Dazed_and_C0nfused said:

banky777 said:

Dazed_and_C0nfused said:

banky777 said:

QrizB said:

For someone in England and Wales who isn't making RAS pension contributions, their earnings from £12570 to £50270 will be taxed at 20%. Earnings above that up to £125240 are taxed at 40% (although complications come in at £100k).

If you make a £30k net contribution to a RAS pension scheme, the £37.5k gross pension contribution increases your 20% band by that amount. So you'll be paying 20% tax on earnings up to £87770.

If you're earning less than £87770, you won't have any income that can take advantage of this increase in your tax band.

So for example if your taxable earnings were £51000, you'd only gain from paying 20% rather than 40% on the £770 above £50270.

Ah OK, I understand. Thanks.

If I earn even a pound over £87770, I would gain from the higher rate, but otherwise, not.

If my salary wasn't sacrificed for pension contributions, I'd be over that amount but presumably that doesn't make a difference?

I'm not sure you have understood this.

Without the gross RAS contribution of £37,500 you would be paying 40% tax on income above £50,270.  With the RAS contribution of £37,500 you would be paying 20% on the earnings from £50,270 to £87,770.  Saving you £7,500 in tax.

You have also previously referred to £45k but doing this is never going to get £45k into your pension.  If you pay £30k using the relief at source method i.e. personal contributions to a SIPP or personal pension, the pension company will add £7.5k in basic rate relief, giving you a pension fund of £37.5k.

There may then be a personal tax saving for you but that doesn't get added to your pension fund, it benefits you personally. 

So irrespective of being a higher rate payer or not you won't ever get more than £37.5k into your pension if you only hand over £30k to start with.

Thanks again for taking time to reply.

The intention would be to pay any rebate from higher rate relief into my pension as well as the original £30K. The rebate may not be the full £7.5K, but I'm trying to understand if I will, at least, receive a proportion of that when I complete my tax return at the end of the year. I've tried putting some figures into Copilot but I'm still not sure I understand it!

My gross salary (after salary sacrifice pension contributions) will be around £82K so, aside from the one-off contribution, I'm currently paying tax at 40%. If I understand correctly, you're saying that making a gross, one-off contribution to my pension of £37.5K would extend my basic rate band beyond my annual earnings so I would no longer be classed as a higher rate tax payer for calculation purposes and therefore not qualify for higher rate relief. But surely, if I'm currently paying tax at the higher rate, there would be some rebate due because I would've overpaid tax at the end of the year.

Am I right?

Can you clarify what exactly you mean by the bit in bold 🤔

Do you think you will receive some higher rate relief, just not on the whole of the £37.5k

Or do you think adding £37.5k will mean you won't be entitled to any higher rate tax relief?

That's what I initially thought but think I understand it now. The key is contributing only the amount (probably around £15K) that optimises the higher rate relief rebate in this tax year and then contributing a similar amount next tax year. This way, over 2 years, I'll benefit from the £7.5K added by my pension provider, plus the maximum higher rate relief rebates.

Have I finally got it?

QrizB

banky777 said:
Have I finally got it?

Yes!

But ...

If you're going to do this over an extended period, rather than as a lump sum, could you increase your salsac contributions by an equivalent amount instead? Then you'd save on NI as well as on income tax.

Linton

Are you still planning to pay for your pension contributions by circulating the same £30K?  If so it may be worthwhile having a look at https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810