Tax on savings interest

PawelK

eskbanker said:

PawelK said:
The way I understand that is that pension contributions will be taxed so while this is tax free I may as well make the most of it. 

How did you reach that understanding from today's budget?!

To be fair, I was listening with one ear while working and overheard that pension contributions will be taxed but didn't get the details. If, like the previous post says, it's only for salary sacrifice, then it won't affect me.

eskbanker

PawelK said:

eskbanker said:

PawelK said:
The way I understand that is that pension contributions will be taxed so while this is tax free I may as well make the most of it. 

How did you reach that understanding from today's budget?!

To be fair, I was listening with one ear while working and overheard that pension contributions will be taxed but didn't get the details. If, like the previous post says, it's only for salary sacrifice, then it won't affect me.

It's not taxing pension contributions made by salary sacrifice either, it's capping the amount of NI relief.

Ceejay3000

Bad reporting again by the press - deliberately perhaps because most journos will be paying into their pensions via salary sacrifice schemes?

What they should be saying clearly is that after the first £2000 then pension contributions via salary sacrifice will be taxed the same as pension contributions made normally through payroll deduction. The only impact from this is employers and employees NI deductions increasing. Oh and those near the basic / higher rate boundary cannot use salary sacrifice to stay as basic rate taxpayers.

Employees will still not be paying any income tax on their pension contributions.

Ceejay3000

PawelK said:

Dazed_and_C0nfused said:

PawelK said:

Dazed_and_C0nfused said:

PawelK said:

Dazed_and_C0nfused said:

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Dazed_and_C0nfused said:

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Dazed_and_C0nfused said:

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Dazed_and_C0nfused said:

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Dazed_and_C0nfused said:

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Dazed_and_C0nfused said:

PawelK said:

Dazed_and_C0nfused said:

PawelK said:

Hello all.

I haven't been on here for a while and I'm sure this subject has been mulled over multiple times but I seem to be missing some trick. 
So far, I understood that the tax free amount you get (500vs1,000) depends on your TAXABLE income and not gross. But lately I was surprised when HMRC messaged me that I owe some tax and when I checked the breakdown, it shows my limit being only £500.

However, from my gross income of roughly 60k, my pension contributions were taking me to around 48k annual taxable income (so below 52,700) hence I was certain my tax free interest cap would be 1,000. 

So, I am either in wrong or HMRC possibly made a mistake although their breakdown of my earnings seem roughly correct. 

Please advise as simply as possible. 😆

Most pension contributions have no impact on your taxable income.

What method did you use to get money into your pension?

If it was relief at source then what does your P60 show your taxable earnings/pension to be?

Hi. 

I just checked and yes, my P45 is showing the amount closer to 59k which was my annual salary (gross) and what HMRC took for their calculations. However, I have been making substantial pension contributions (14%) through salary sacrifice so I thought this will reduce my taxable income from 59kto 51k which would be still within the basic rate tax and giving me a 1,000 tax free allowance on interest and not 500. 

Salary sacrifice is where you don't contribute to a pension so there is nothing for you to claim or tell HMRC about.

You are agreeing to a reduced salary in return for extra employer contributions.  But as you don't have that salary anymore you don't pay tax (or NI) on it.

Have you checked your pension account to make sure employer contributions, with no pension tax relief, are being added?

Is it possible that your salary is closer to £70k and post sacrifice the £59k is correct?

What do your payslips show?  Maybe your employer has made a mistake processing the payroll?

Thank you for your reply. No, my gross salary was around 59k and my monthly pay slips were always showing my 14% contributions deducted from gross. That was making my monthly taxable pay around 4.2k instead of 4.9k so in 12 months time I expected it to be around 50k (4.2x12).

Then this still doesn't make sense.  

I just checked and yes, my P45 is showing the amount closer to 59k which was my annual salary (gross) and what HMRC took for their calculations. However, I have been making substantial pension contributions (14%) through salary sacrifice so I thought this will reduce my taxable income from 59k to 51k

You still haven't been contributing anything to a pension but if you have sacrificed £8k of your income for additional employer contributions then you would have expected that to be reflected on your P60 (is the reference to a P45 be used you have changed jobs?).

That would be of far more concern to me than whether the first £500 or £1,000 of your interest is taxed at 0% 😳

My ex employer had a scheme where me contributing 7% was maxing up their contribution of 11%. However. I have increased my part voluntarily from 7 to 14 while back. Yes, P45 means I finished that employment in March. I started new job last week of March which added an extra 1k to the whole tax year after my new contribution to pension of 20% was already deducted). I'm still confused about why my taxable income shows as 58k which is close to my gross salary for the year. That would mean that my monthly salary contribution of 14% didn't make any difference to my taxable income. 

Are you quite certain that the method used by your ex employer was salary sacrifice?

The figures make it seem more like relief at source.  This is where there is no impact on your taxable income but you get basic rate relief added to your pension fund.  So £80 you pay ends up as £100 in the pension.  And the gross contribution increases your basic rate band (if you tell HMRC about the pension).

Am I confusing the terms? If so. I apologise! It's one of the most common benefit (especially since legally established) where upon commencing your employment you can opt in to a workplace pension where employer contribute to your pot (I think legally it is minimum of 3%) and an employee contributed 5%? In many companies this is staggered so the more you contribute the more, up to certain cap, your employer puts in as well. 

I am pretty sure my payslips where always showing my gross salary, less my pension contribution and the difference was my taxable income. 

That is auto enrolment.

What you need to check is the method used to get money into the pension.

You are saying it is salary sacrifice and that is where you have agreed to have a reduced salary in return for extra employer contributions to your pension.

A lot of auto enrolment schemes use relief at source, which is where you pay a net contribution and the pension company adds basic rate tax relief.

If it is relief at source then you may well be due a tax refund as you look to be entitled to some higher rate relief.

But you 100% have to understand the method used for the tax year in question (2024/25?) before doing anything else.

In that case it's definitely relief at source. Does this method (by increasing my %) have no impact on my taxable income?

No, no impact whatsoever.

But if your tax calculation shows you have paid higher rate tax in the tax year you have paid some relief at source contributions then you are entitled to an increased basic rate band.

For example the standard basic rate band in 2024/25 was £37,700 and if you contributed £8,000 gross (£6,400 you paid plus £1,609 which the pension company added in basic rate tax relief) then your basic rate band would be increased to £45,700.

You can make a claim on gov.uk.

https://www.gov.uk/guidance/claim-tax-relief-on-your-private-pension-payments

Note any higher rate tax saving benefits you, it is NOT added to your pension fund.

If my contributions would extend my basic rate band to 45,700 (assuming this is without 12,570 tax free allowance), that means that I just marginally exceeded the interest tax free threshold as my taxable income is shown as 58,700 and the above would add up to 58,270. Am I right?

In that case you would still be deemed a higher rate payer and only have £500 interest taxed at 0%.

But how much income does the calculation show was taxed at 40%?  Most of that would change to being taxed at 20%, far more beneficial to you than the extra £500 interest being taxed at 0% aspect!

And what was your gross relief at source contribution in the tax year involved?

The breakdown shows as follows:
60.8k total income 
Less 12.57k tax free
Taxable income 48.3k
Income tax:
500 PSA - 0
37,700 at 20%
10,112 at 40%
The end result is that the tax from the above is higher by over £200 than what I already paid.

On another note, if in this tax year my salary is 60k and I contribute 12k via relief at source (20%) plus 5% from my employer, I understand I will again have only 500 PSA for tax year 25/26?

Do you have any idea how much you paid in that tax year (the gross amount)?  

It could be the higher rate relief you are entitled to far outweighs that £200 and you could get over £1k back as a tax refund.

What your employer contributes is of no relevance.  

Not sure why you are so focused on the interest to be honest, the higher rate tax relief on £12k could easily be worth £2k+ in the current tax year.

Yes, I paid £220 less than what HMRC shows me should be paid (from the above example, 20% from 37,700 and 40% from 10,112. 

I focused on PSA because my taxable interest earnings annually are just over 1,000 so I thought that if I contribute enough to my pension, it would bring my taxable income down, giving me 1,000 PSA which in turn would minimise my tax liability completely and whatever is over 1,000 would be taxed at 20% and not 40.

But that is a drop in the ocean compared to the higher rate relief you don't seem overly bothered about 🤷

And sorting one will resolve the other (if the figures stack up).

I'm not getting what you're saying about "higher rate relief I'm getting" rather than not being bothered. 🫣

What would happen to your tax liability for 2024/25 if you replaced the £37,700 taxed at 20% with the correct, increased, basic rate band?

You would pay a lot more tax at 20%.  But a lot less at 40% 😉

And yet I can't see my tax rate band increased. What are the ways to achieve that? Investing more into my private pension but outside of workplace one?

Thank you for all your time today.

You have previously said you have already been doing it in 2024/25.  You just haven't told HMRC about it yet.

That is what you need to make a claim for from the link in one of the earlier posts.

If you aren't proactive in making a claim for the extra relief you won't get it automatically.

Previously I was far more confused. The only way I ever contributed to my pension was through my workplace. If that doesn't reduce my taxable income then is there any other way to have 1,000 PSA apart from adding to my pension pot outside of work?

By having an increased basic rate band is one method.  Which you already say you have achieved by making relief at source pension contributions.

Having less salary would achieve the same end result but don't get hung up on your taxable income, it is the tax rate you are liable to that matters so having a larger basic rate band can achieve the same objective.

Still annoying that I cannot get the highest PSA and have to share big chunk of my savings interest with Rachel. 😞

That is only a problem for the previous tax year (2024/25).

If you contribute enough to your pension then you can still avoid being a higher rate payer in the current tax year.  Having less taxable income isn't the only way to achieve your objective.

You might find this useful with regard to relief at source pension contributions.

https://www.litrg.org.uk/pensions/paying-pensions/tax-relief-pension-contributions/how-tax-relief-given-pension-contributions

Thank you for the link. It seems that I am not even in a "relief at source" scheme but "net" one because full percentage of my contributions is deducted from my pay so I get tax relief automatically. 

If that's the case how can you explain your P60 showing the £59k as taxable earnings 🤔

That was exactly my point from the begining. I must be missing something so I will try to get all of my payslips from 24/25 and see exactly what was being added month on month to have a better picture. 

Sounds like a good idea. 

During the course of this thread you have been using salary sacrifice, making relief at source contributions and making net pay contributions.

The facts would definitely help you understand this!

I just wanted to thank you again for your time as I was finally able to read the details of each workplace pension arrangements and it clearly shows that I have been always in Net Pay. While I'm waiting for my ex employer to provide me with the payslips, to understand my taxable income being higher than I expected, it became clear that for this tax year I should further increase my contributions for the remaining four months so hopefully I will be getting 1,000 PSA for 25/26. Have to make the most of it before tax on pension contributions kicks in in 2029 as announced in the latest budget. 

There has not been any such announcements.

Nothing whatsoever is changing with regard it tax relief on pension contributions.  But there will be limits on the NI savings people can make.  

The way I understand that is that pension contributions will be taxed so while this is tax free I may as well make the most of it. 

A perfect example of someone misled by the press spin!

Notepad_Phil

Ceejay3000 said:

.... Oh and those near the basic / higher rate boundary cannot use salary sacrifice to stay as basic rate taxpayers...

Are you sure about that? Provided the employer doesn't just scrap salary sacrifice then an employee can continue putting big contributions in to reduce their salary and so keep within basic rate, they just won't get the saving of NI on the entire contribution.

dcs34

Ceejay3000 said:

Employees will still not be paying any income tax on their pension contributions.

Please explain the difference between income tax and national insurance payments in practical terms - at the end of the day it's reducing the benefit of salary sacrifice which is nonsensical at a time when the government should be encourage people to be planning for their long term financial futures. In real terms people* will be "taxed" on pension contributions above £2k - you say it's the only impact, well yes; that's the impact their talking about!

*People excluding anyone on defined benefit pensions...like most MPs, public sector workers, Civil Servants, trade union leaders...

Dazed_and_C0nfused

dcs34 said:

Ceejay3000 said:

Employees will still not be paying any income tax on their pension contributions.

Please explain the difference between income tax and national insurance payments in practical terms - at the end of the day it's reducing the benefit of salary sacrifice which is nonsensical at a time when the government should be encourage people to be planning for their long term financial futures. In real terms people* will be "taxed" on pension contributions above £2k - you say it's the only impact, well yes; that's the impact their talking about!

*People excluding anyone on defined benefit pensions...like most MPs, public sector workers, Civil Servants, trade union leaders...

No one is being taxed on pension contributions within the normal limits for tax relief and the annual allowance.

All that is changing is the ability to avoid paying National Insurance on money being put into a pension is being limited.

Salary sacrifice still lets you avoid being taxed on the amount sacrificed.

You are correct that this is unlikely to impact people in defined benefit schemes such as civil servants as those schemes use the net pay method and have never given people the benefit of avoiding paying NI.

dcs34

" the ability to avoid paying National Insurance on money being put into a pension is being limited"

AKA one is paying more "tax".