Salary exchange and six-figure curse

lynxthecat wrote: »

Am I correct that with the system above, for the first few years in respect of the unused allowance from previous years, private pension contributions can be made (which receive 20% relief at pension provider) and tax relief can be claimed from HMRC on the marginal rate?

The way I think of it or that the amount that can end up in your pension gross is the lesser of £40k and [earnings including the DC contribution from your employer] ; but the figure of £40k may be reduced by taper (if you had a big bonus and ended up on £150k+), and increased by the carry-forward available from previous years where you didn't use your full [£40k or less if tapered down for high earnings].

So if I'm reading your question correct, then when you first start following your plan you will likely have some spare unused allowance from previous years - and yes, you can use that up by making personal contributions out of your taxed salary into a pension. E.g. £800 into pension from your after-tax salary, provider will claim a gross up from HMRC in due course, and separately you tell HMRC what you paid in via your tax return and they work out that the £1000 in your pension should have only cost you (e.g.) £400 if you're in the awkward 60% tax bracket, or £600 if you're in the 40% bracket at that stage, or a blend of the two depending on your actual marginal rate of tax for that £1000. So you'll get back the difference between the £800 you paid and the [£400 to £600] it should have cost you to make that £1000 gross contribution.

Effectively what you end up paying ends up being your marginal rate and of course if you did an absolutely massive contribution that marginal rate on some of the contributions might only be 20%, but you'd probably have the sense to stop and carry forward for future years to save at 40-60% instead...

The extra amount of carry forward from previous years, you don't *have* to do as a private contribution, in theory If you had visibility over your spare cash and likely bonus and amount of known carry forward available you could just ask your employer to let you sacrifice even larger amounts and save even more NI. But employer HR or payroll depts typically get nervous about letting someone exchange over £40k in a year because of feeling some kind of implicit responsibility to check your carry forward allowance exists, which they can't do without knowing your private financial details and they're not tax advisors. So a private contribution yourself before 5April is usually the way to go.