+100K salary and pension
Discussion
Hi all.
I've been fortunate enough to earn a +22% pay increase for this year, which kicks in on 1st July. I'll get it in Octobers pay, backdated so HMRC is currently unaware of the uplift. On top of that, I can get up to a15k bonus. My total pay will be circa £120K. I'm three of years away from retirement.
To avoid the 60% tax trap at 100K, I was planning on putting everything over that figure into my pension. However, my manager said what he does is take it as salary, then before 31st March put it all, or a proportion of it into his pension, then he used Self Assessment to claim back the tax. He does this as he says it gives him flexibility over the year, should he need the extra cash. As he said, if it's in your pension, well you can't access it until you take your pension. That seems perfectly sensible to me, but I was wondering if it this is as tax efficient, as just putting it all in a pension?
Is filling in a SA form really going to get me back all that tax?
Cheers.
I've been fortunate enough to earn a +22% pay increase for this year, which kicks in on 1st July. I'll get it in Octobers pay, backdated so HMRC is currently unaware of the uplift. On top of that, I can get up to a15k bonus. My total pay will be circa £120K. I'm three of years away from retirement.
To avoid the 60% tax trap at 100K, I was planning on putting everything over that figure into my pension. However, my manager said what he does is take it as salary, then before 31st March put it all, or a proportion of it into his pension, then he used Self Assessment to claim back the tax. He does this as he says it gives him flexibility over the year, should he need the extra cash. As he said, if it's in your pension, well you can't access it until you take your pension. That seems perfectly sensible to me, but I was wondering if it this is as tax efficient, as just putting it all in a pension?
Is filling in a SA form really going to get me back all that tax?
Cheers.
Just be aware that if you make the pension payments yourself they get automatically grossed up at basic rate, then you claim back the difference up yo your marginal rate.
ie if you send the pension provider £15K, they get £5K directly from HMRC so it's like you paid £20K in. At 40% tax you'd get another £5K back from self assessment.
If you were trying to get £120K gross down to exactly £100K that's probably quite a tricky calculation with the allowance restrictio and if you have other deductiions - don't know if there's a calculator somewhere you can use.
If you can do it by salary sacrifice then it's a lot more straightforward as no tax to think about. Plus, as said above, you'll save your on NI and your employer should be thrilled as they'd save a bundle on employers NI (it's very unusual fro them to give you that saving though).
ie if you send the pension provider £15K, they get £5K directly from HMRC so it's like you paid £20K in. At 40% tax you'd get another £5K back from self assessment.
If you were trying to get £120K gross down to exactly £100K that's probably quite a tricky calculation with the allowance restrictio and if you have other deductiions - don't know if there's a calculator somewhere you can use.
If you can do it by salary sacrifice then it's a lot more straightforward as no tax to think about. Plus, as said above, you'll save your on NI and your employer should be thrilled as they'd save a bundle on employers NI (it's very unusual fro them to give you that saving though).
Sheepshanks said:
ie if you send the pension provider £15K, they get £5K directly from HMRC so it's like you paid £20K in. At 40% tax you'd get another £5K back from self assessment.
.
Can you explain that? Are you saying I pay £15k, HMRC adds £5K to that AND I can then claim through SA another £5k and that gets refunded to me, or goes into my pension?.
Thanks!!
LHRFlightman said:
Sheepshanks said:
ie if you send the pension provider £15K, they get £5K directly from HMRC so it's like you paid £20K in. At 40% tax you'd get another £5K back from self assessment.
.
Can you explain that? Are you saying I pay £15k, HMRC adds £5K to that AND I can then claim through SA another £5k and that gets refunded to me, or goes into my pension?.
Thanks!!
You should be aware that the figure used to calculate the 100k is not simply your salary it's your adjusted net income which is influenced by other factors as per the guidance below.
https://www.gov.uk/guidance/adjusted-net-income
LHRFlightman said:
Thank for the info on NI! And no, my company doesn't give it to us.
This is an interesting dilemma. No real advice but some of my thoughts.NI is only 2%, so not the end of the world.
Lump sum or regular investing, sometimes called pound cost averaging, depending on what the market does over say 12 months. One maybe better than the other.
You could put the amount over £100,000 into your own SIPP rather than your company scheme, which may give you more investment options. This can be done monthly or annually as per your boss. If you are over 55, you could then access your SIPP for emergency money if needed.
I’m sure others will have ideas too.
I've done both approaches over the years -
1) sal sac (including the company giving my pension the EE NI component @13.8%)
and
2) taking the salary each month and waiting until March 31st before calculating how much to drop into a SIPP.
sal sacrifice is obviously better financially, and easier to administer; 2) works for reducing the salary to below the 100K level and I usually work the numbers out using the MSE tax calculator once I have the last payslip of the financial year. It tends to work quite well.
Obviously if you must get to <100K (e.g. if you are making use of the 30hours of free childcare etc), then it's worth triple checking the numbers to make sure you don't accidentally (P11D benefits for example) go over the magic number....
3 years out from retirement, it may be worth dumping even more into the pension being as you can get 25% of it back tax free in 3 years time....
1) sal sac (including the company giving my pension the EE NI component @13.8%)
and
2) taking the salary each month and waiting until March 31st before calculating how much to drop into a SIPP.
sal sacrifice is obviously better financially, and easier to administer; 2) works for reducing the salary to below the 100K level and I usually work the numbers out using the MSE tax calculator once I have the last payslip of the financial year. It tends to work quite well.
Obviously if you must get to <100K (e.g. if you are making use of the 30hours of free childcare etc), then it's worth triple checking the numbers to make sure you don't accidentally (P11D benefits for example) go over the magic number....
3 years out from retirement, it may be worth dumping even more into the pension being as you can get 25% of it back tax free in 3 years time....
JeremyH5 said:
Another idea to consider, if needing to cover off the £20k plus the £15k bonus if it happens is to look at going back to earlier tax years ( up to 3years back) and topping up pension fund that way.
He'd already included the bonus. You've got to max out the current year before you can start going back to earlier years.Sheepshanks said:
Just be aware that if you make the pension payments yourself they get automatically grossed up at basic rate, then you claim back the difference up yo your marginal rate.
ie if you send the pension provider £15K, they get £5K directly from HMRC so it's like you paid £20K in. At 40% tax you'd get another £5K back from self assessment.
If you were trying to get £120K gross down to exactly £100K that's probably quite a tricky calculation with the allowance restrictio and if you have other deductiions - don't know if there's a calculator somewhere you can use.
If you can do it by salary sacrifice then it's a lot more straightforward as no tax to think about. Plus, as said above, you'll save your on NI and your employer should be thrilled as they'd save a bundle on employers NI (it's very unusual fro them to give you that saving though).
Your concept is right but the numbers are wrong.ie if you send the pension provider £15K, they get £5K directly from HMRC so it's like you paid £20K in. At 40% tax you'd get another £5K back from self assessment.
If you were trying to get £120K gross down to exactly £100K that's probably quite a tricky calculation with the allowance restrictio and if you have other deductiions - don't know if there's a calculator somewhere you can use.
If you can do it by salary sacrifice then it's a lot more straightforward as no tax to think about. Plus, as said above, you'll save your on NI and your employer should be thrilled as they'd save a bundle on employers NI (it's very unusual fro them to give you that saving though).
If you paid in £16k, the provider gets a £4k top up from HMRC so it looks like you paid a gross contribution of £20k. You then, as a 40% tax payer, claim a further £4k back through your tax return. So the £20k contribution has cost you £12k (ie, 60% of £20k)
(Complications like NI ignored.)
Zigster said:
Your concept is right but the numbers are wrong.
If you paid in £16k, the provider gets a £4k top up from HMRC so it looks like you paid a gross contribution of £20k. You then, as a 40% tax payer, claim a further £4k back through your tax return. So the £20k contribution has cost you £12k (ie, 60% of £20k)
(Complications like NI ignored.)
Ah, thanks - I know what I did, I started off with a £20K payment then realised it would too much but didn't change the other figures.If you paid in £16k, the provider gets a £4k top up from HMRC so it looks like you paid a gross contribution of £20k. You then, as a 40% tax payer, claim a further £4k back through your tax return. So the £20k contribution has cost you £12k (ie, 60% of £20k)
(Complications like NI ignored.)
borcy said:
Do you have a link to that form?
It's an online service:https://www.gov.uk/guidance/claim-tax-relief-on-yo...
LeighW said:
borcy said:
Do you have a link to that form?
It's an online service:https://www.gov.uk/guidance/claim-tax-relief-on-yo...
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