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  • FIRST POST
    • user1168934
    • By user1168934 11th Sep 19, 3:39 PM
    • 419Posts
    • 261Thanks
    user1168934
    paying 40% tax - additional pension contributions?
    • #1
    • 11th Sep 19, 3:39 PM
    paying 40% tax - additional pension contributions? 11th Sep 19 at 3:39 PM
    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 46,350 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?
    Last edited by user1168934; 12-09-2019 at 12:09 PM.
    Save 12k in 2015 #193 (target 12,000) : 12,690 (105.75%)
    Save 12k in 2016 #130 (target 18,000) : 15,000 (83.33%)
    Save 12k in 2019 #166 (target 12,000) : 4,762 (39.68%) ... on track so far
Page 1
    • lisyloo
    • By lisyloo 11th Sep 19, 4:00 PM
    • 25,441 Posts
    • 13,644 Thanks
    lisyloo
    • #2
    • 11th Sep 19, 4:00 PM
    • #2
    • 11th Sep 19, 4:00 PM
    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
    • By user1168934 11th Sep 19, 4:33 PM
    • 419 Posts
    • 261 Thanks
    user1168934
    • #3
    • 11th Sep 19, 4:33 PM
    • #3
    • 11th Sep 19, 4:33 PM
    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.
    Originally posted by lisyloo

    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?
    Save 12k in 2015 #193 (target 12,000) : 12,690 (105.75%)
    Save 12k in 2016 #130 (target 18,000) : 15,000 (83.33%)
    Save 12k in 2019 #166 (target 12,000) : 4,762 (39.68%) ... on track so far
    • Dazed and confused
    • By Dazed and confused 11th Sep 19, 7:28 PM
    • 5,388 Posts
    • 2,860 Thanks
    Dazed and confused
    • #4
    • 11th Sep 19, 7:28 PM
    • #4
    • 11th Sep 19, 7:28 PM
    Where have you got the 46,350 figure from?

    Are you Scottish tax resident for tax purposes?
    • user1168934
    • By user1168934 12th Sep 19, 11:09 AM
    • 419 Posts
    • 261 Thanks
    user1168934
    • #5
    • 12th Sep 19, 11:09 AM
    • #5
    • 12th Sep 19, 11:09 AM
    Where have you got the 46,350 figure from?

    Are you Scottish tax resident for tax purposes?
    Originally posted by Dazed and confused

    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.
    Last edited by user1168934; 12-09-2019 at 11:17 AM.
    Save 12k in 2015 #193 (target 12,000) : 12,690 (105.75%)
    Save 12k in 2016 #130 (target 18,000) : 15,000 (83.33%)
    Save 12k in 2019 #166 (target 12,000) : 4,762 (39.68%) ... on track so far
    • user1168934
    • By user1168934 12th Sep 19, 3:18 PM
    • 419 Posts
    • 261 Thanks
    user1168934
    • #6
    • 12th Sep 19, 3:18 PM
    • #6
    • 12th Sep 19, 3:18 PM
    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?
    Save 12k in 2015 #193 (target 12,000) : 12,690 (105.75%)
    Save 12k in 2016 #130 (target 18,000) : 15,000 (83.33%)
    Save 12k in 2019 #166 (target 12,000) : 4,762 (39.68%) ... on track so far
    • xylophone
    • By xylophone 12th Sep 19, 4:22 PM
    • 31,403 Posts
    • 19,468 Thanks
    xylophone
    • #7
    • 12th Sep 19, 4:22 PM
    • #7
    • 12th Sep 19, 4:22 PM
    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
    • By user1168934 13th Sep 19, 9:21 AM
    • 419 Posts
    • 261 Thanks
    user1168934
    • #8
    • 13th Sep 19, 9:21 AM
    • #8
    • 13th Sep 19, 9:21 AM

    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?
    Save 12k in 2015 #193 (target 12,000) : 12,690 (105.75%)
    Save 12k in 2016 #130 (target 18,000) : 15,000 (83.33%)
    Save 12k in 2019 #166 (target 12,000) : 4,762 (39.68%) ... on track so far
    • cloud_dog
    • By cloud_dog 13th Sep 19, 1:09 PM
    • 4,556 Posts
    • 2,853 Thanks
    cloud_dog
    • #9
    • 13th Sep 19, 1:09 PM
    • #9
    • 13th Sep 19, 1:09 PM
    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?
    Originally posted by user1168934
    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.
    Personal Responsibility - Sad but True

    Sometimes.... I am like a dog with a bone
    • user1168934
    • By user1168934 16th Sep 19, 9:19 AM
    • 419 Posts
    • 261 Thanks
    user1168934
    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.
    Originally posted by cloud_dog

    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.
    Save 12k in 2015 #193 (target 12,000) : 12,690 (105.75%)
    Save 12k in 2016 #130 (target 18,000) : 15,000 (83.33%)
    Save 12k in 2019 #166 (target 12,000) : 4,762 (39.68%) ... on track so far
    • cloud_dog
    • By cloud_dog 17th Sep 19, 9:54 PM
    • 4,556 Posts
    • 2,853 Thanks
    cloud_dog
    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.
    Originally posted by user1168934
    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.
    Last edited by cloud_dog; 17-09-2019 at 10:01 PM.
    Personal Responsibility - Sad but True

    Sometimes.... I am like a dog with a bone
    • Lokolo
    • By Lokolo 18th Sep 19, 8:38 AM
    • 20,216 Posts
    • 15,399 Thanks
    Lokolo
    Just to expand on cloud_dog.

    The difference between that and a SIPP is that with the SIPP you do not get your NI contributions added. You only get the Income Tax (20%/40%) part added.

    So you would lose out on the extra 12%/2% NI and the extra 6.9% NI employer contribution by putting money in via a SIPP rather than use your company's salary sacrifice scheme.
    • user1168934
    • By user1168934 18th Sep 19, 10:12 AM
    • 419 Posts
    • 261 Thanks
    user1168934
    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.
    Originally posted by cloud_dog



    Thank you very much, that makes much more sense.
    Your assumption is correct about the 6.9%. I have trawled through the old emails I had and they state that the compnay will share half the NI savings.
    Save 12k in 2015 #193 (target 12,000) : 12,690 (105.75%)
    Save 12k in 2016 #130 (target 18,000) : 15,000 (83.33%)
    Save 12k in 2019 #166 (target 12,000) : 4,762 (39.68%) ... on track so far
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