Does Increasing pension contributions reduce tax.

peteuk

I'm hovering around the 40% tax bracket due to full time income and personal pension currently paying £12K per year.

Through my employer I am paying into a pension which I will draw at the age of 68 (15 yrs time) at present my taxable allowance is on my pension and I am paying 20% income tax on my full time income.

If I go over the 40% income tax bracket, what happens if I start making a personal contribution reducing my income to under the 40% level.

Dazed_and_C0nfused

A personal contribution would be made using the relief at source method so it doesn't reduce your taxable income.

But you would be entitled to an increased basic rate band, meaning more income can be taxed at 20% and less at 40%.

Qyburn

In what way are you receiving pension income? It may disqualify you from paying more than £3,600 (gross) into another pension.

Marcon

https://forums.moneysavingexpert.com/discussion/comment/82072180#Comment_82072180

Not sure where the £3,600 comes from in this context. If OP has triggered the Money Purchase Annual Allowance by flexibly accessing a defined contribution scheme (he hasn't - looking at previous posts it's a military pension, which is a defined benefit scheme), then future contributions would be limited to a maximum of £10,000 a year, including any employer contributions.

If the pension income is £12K and he is hovering around hitting the 40% tax bracket, then he clearly has sufficient earned income to make personal contributions well above £10K a year if he chooses to do so, subject to the overall (ie including employer contributions ) Annual Allowance limit of £60K.

GunJack

OP, if you're paying your current works pension by salary sacrifice, then all you need to do is raise your contribution by a few percent to bring your salary down, that way avoiding paying tax on the salary you're sacrificing.

Marcon

https://forums.moneysavingexpert.com/discussion/comment/82072336#Comment_82072336

There'd be an NI saving by using salary sacrifice, but the overall income tax position would ultimately be the same.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82072336#Comment_82072336

Even if it is not a salary sacrifice scheme, increasing contributions to it would still have the desired effect.

Qyburn

https://forums.moneysavingexpert.com/discussion/comment/82072259#Comment_82072259

Not sure where the £3,600 comes from in this context

My mistake.

peteuk

https://forums.moneysavingexpert.com/discussion/comment/82072259#Comment_82072259

24 years service, left aged 48 with a immediate pension. Currently just under the 40% tax bracket so another pay rise and I’m over it. Just trying to further protect my future, health-wise I’m ok but not expecting that to last. Certainly can’t see it lasting another 15 yrs till I hit SPA (currently 68).

Thanks for the advice I will speak to HR about increasing my pension contributions. Having been with my current employer for three years they have just increased their contributions.

I know it sounds like I’m avoiding paying 40% tax (if it quacks and waddles like a duck, it’s a duck). But having given the majority of my life to either the NHS or military, I’m looking after me.

Albermarle

I know it sounds like I’m avoiding paying 40% tax (if it quacks and waddles like a duck, it’s a duck). But having given the majority of my life to either the NHS or military, I’m looking after me

I would guess that most of the regular contributors to this forum have benefitted from 40% tax relief on pension contributions at some point. Although some legal ways to avoid tax are in a more morally grey area, this is not one of them. It is a very generous system though, especially if you are a 20% taxpayer when you withdraw the money later.

monkey-fingers

https://forums.moneysavingexpert.com/discussion/comment/82074127#Comment_82074127

Right now, I'm avoiding 45% AND 40% by putting my full max allowance into my pot.