paying 40% tax - additional pension contributions?

user1168934 · 11 September 2019 at 4:39PM

I have been thinking about cutting my tax payments for years and have never done it. Hopefully, I will sort it out this time.

I am a 40% tax payer working full time. I would like to cut the tax to the bare minimum, what is the best way of achieving this?

I have been reading around and it seems like increasing pension contributions seems to be the simplest one.

My understanding is that if I contribute any taxable income over [STRIKE]46,350[/STRIKE] 50,000 towards the pension scheme then my tax will get down to 20%. Is my understanding correct?

I do contribute into a workplace pension scheme. Should I increase the monthly contributions going into it?or do I need to open a SIPP and make additional contributions myself?
Which options is the simplest in terms of claiming back the tax amount?

lisyloo · 11 September 2019 at 5:00PM

Does your employer offer a salary sacrifice arrangement?
If so this is best because it means you don’t pay tax or NI and sometimes employers even pass on the employers NI as well.

If you pay into your pension from net salary then the pension provider will only claim back basic rate tax relief (as they don’t know everyone’s tax rate).

You should then contact HMRC and claim back the additional tax relief.
This goes into your pocket not your pension.
Does this mean you haven’t been doing this?

So step 1, check your payslip to see whether you pension is taken from gross or net salary.
This should be simple. Multiply the salary on your payslip by 12, then you should know whether your pension has already been deducted or not.

Clearly if there are NI benefits then your workplace scheme is best even if you later choose to transfer out.

user1168934 · 11 September 2019 at 5:33PM

lisyloo wrote: »

Does your employer offer a salary sacrifice arrangement?
If so this is best because it means you don’t pay tax or NI and sometimes employers even pass on the employers NI as well.

If you pay into your pension from net salary then the pension provider will only claim back basic rate tax relief (as they don’t know everyone’s tax rate).

You should then contact HMRC and claim back the additional tax relief.
This goes into your pocket not your pension.
Does this mean you haven’t been doing this?

So step 1, check your payslip to see whether you pension is taken from gross or net salary.
This should be simple. Multiply the salary on your payslip by 12, then you should know whether your pension has already been deducted or not.

Clearly if there are NI benefits then your workplace scheme is best even if you later choose to transfer out.

Thanks for your reply. My company does salary sacrifice and matching contributions. At the moment I am paying the amount that gets me the maximum matching contribution from the company. If I start paying extra, will I get more in terms of NI benefit?

Dazed_and_confused · 11 September 2019 at 8:28PM

Where have you got the 46,350 figure from?

Are you Scottish tax resident for tax purposes?

user1168934 · 12 September 2019 at 12:09PM

Dazed_and_confused wrote: »

Where have you got the 46,350 figure from?

Are you Scottish tax resident for tax purposes?

No, I am in England. I just googled and got the rate from there. I have searched again and I am getting £50,000. I hope I got it correct this time

Thanks for pointing out.

EDIT:
Found the link where I got the rate from. Because it said "The current rates ..." I just took the figure without realizing that it is an old article.
https://www.mileiq.com/en-gb/blog/income-tax-rates-2019-20-uk/
Also google preview was showing the wrong rates too. Try searching for "uk income tax bands" and google still shows the incorrect ones.

user1168934 · 12 September 2019 at 4:18PM

I have been trying to contact payroll in my company to increase contributions but they are not very responsive ... and I have been told by people that they are a bit like that.

Is there any issues worth considering with going down the SIPP route? (I mean other than paying contributions from net salary and then claiming back from HMRC). I am already registered for tax return self assessment and so I have to file a tax return anyway.

I am also thinking that I get a bonus each year. Since the amount varies, I will have to keep asking payroll each year to adjust the contributions in order to keep me below the 40% threshold. Given that the payroll are not very helpful, I am thinking it might be better to have a SIPP where I can make contributions as and when and for whatever amount I see fit.

What do you guys think?

xylophone · 12 September 2019 at 5:22PM

https://www.litrg.org.uk/latest-news/news/181214-do-you-understand-how-tax-relief-your-pension-contributions-works

https://www.pensionbee.com/pensions-explained/pension-contributions/pension-contribution-limits

Is the pension contribution wholly by salary sacrifice? That is to say, it is wholly an employer's contribution?

user1168934 · 13 September 2019 at 10:21AM

xylophone wrote: »

https://www.litrg.org.uk/latest-news/news/181214-do-you-understand-how-tax-relief-your-pension-contributions-works

https://www.pensionbee.com/pensions-explained/pension-contributions/pension-contribution-limits

Is the pension contribution wholly by salary sacrifice? That is to say, it is wholly an employer's contribution?

On my payslip, it shows up as salary sacrifice. That is all I know about it. Does that answer your question? Why do you ask?

cloud_dog · 13 September 2019 at 2:09PM

user1168934 wrote: »

On my payslip, it shows up as salary sacrifice. That is all I know about it. Does that answer your question? Why do you ask?

Financially you would be better off using your company's salary sacrifice method of contribution as you would gain an extra 2% of NI contributions at the 40% rate and 12% NI contribution savings in the 20% band.

Re getting a bonus etc, it all really depends on what your salary is, i.e. how much over £50k your standard earnings are and roughly what size of bonus you receive?

Just because your payroll are hard to deal with is not a reason to go for a easier option which is financially less efficient for you.

user1168934 · 16 September 2019 at 10:19AM

cloud_dog wrote: »

Financially you would be better off using your company's salary sacrifice method of contribution as you would gain an extra 2% of NI contributions at the 40% rate and 12% NI contribution savings in the 20% band.

Re getting a bonus etc, it all really depends on what your salary is, i.e. how much over £50k your standard earnings are and roughly what size of bonus you receive?

Just because your payroll are hard to deal with is not a reason to go for a easier option which is financially less efficient for you.

Thanks but can you kindly clarify where you got the 2% and 12% savings from? Also 2% and 12% of what amount exactly?
At the moment my company says I get an NI savings of 6.9%. Again, I don't know how they calculated 6.9% and 6.9% of what. What I do know is that it is very small amount monthly, something like £10ish.

sorry I dont't really understand these things but I am trying to.

cloud_dog · 17 September 2019 at 10:54PM

user1168934 wrote: »

Thanks but can you kindly clarify where you got the 2% and 12% savings from? Also 2% and 12% of what amount exactly?
At the moment my company says I get an NI savings of 6.9%. Again, I don't know how they calculated 6.9% and 6.9% of what. What I do know is that it is very small amount monthly, something like £10ish.

sorry I dont't really understand these things but I am trying to.

The fundamental thing to understand with salary sacrifice is that the monies you sacrifice (pension contributions) are never paid or attributed to you. Your company promises to pay that money on your behalf in to a pension scheme.

This where the NI savings come in to it. As the money is never yours it cannot be liable for taxation or national insurance deductions as part of your salary. Earnings in the 40% tax bracket attract a NI rate of 2%. The 2% savings for a HRT payer is based on the amount you (sacrifice) pay in to your pension. If you paid £100 in to your pension your take home (net) pay would only be reduced by £58% (saving 40% tax, 2%NI). If you were a basic rate tax payer the cost (reduction in take home pay) for putting £100 in to your pension would be £68 (saving 20% tax, 12% NI; basic rate tax band attracts a NI rate of 12%).

You mention your company says you get a saving of 6.9%. I'm going to guess at this but, just as you pay NI contributions on your earnings so does your company. The company NI rate is 13.8%. I think what your company has done is to offer you half of their NI savings (6.9%).

The effect of this on your imaginary £100 pension contribution is that it only costs you, reduces your take home pay by £51.10 (40% tax, 2% employee NI, and 6.9% employer NI).

Basically £100 goes in to your pension and you are only paying just over £51 for that £100. Another way to look at it is that virtually double your cost (reduced take home pay) goes in to your pension!!!! I would suggest this is an opportunity not to be wasted.

paying 40% tax - additional pension contributions?

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