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Where Taxpayers and Advisers Meet

Additional Pension contributions to reduce 40% tax

Pensionbuilder2024
Posts: 3
Joined: Wed Mar 28, 2018 8:26 pm

Additional Pension contributions to reduce 40% tax

Postby Pensionbuilder2024 » Wed Mar 28, 2018 9:02 pm

I have my end of year figures for 2017-18.

I earned £63,205
Niable £57,381

Having paid £11,552 tax
£4,785 national ins
£5,590 occupational pension contributions

I have further paid £6,000 net so far into a private pension.

Questions-
1, How much can I contribute in my private pension to reduce/reclaim 40% liability?
2, I am the only paid worker in our marriage with 3 children hence the need to stay below the 50k taxable pay. If I pay more and get below the 40% tax bracket can I claim part of my wife's tax allowance I think it's around 1100 pounds? Ie about 250 net.
3, I understand I get 20% uplift on pension payments but how do i get the full 40% tax back? Via a higher personal allowance 2018-19?

Thank you in advance
Andy

robbob
Posts: 2982
Joined: Wed Aug 06, 2008 4:01 pm

Re: Additional Pension contributions to reduce 40% tax

Postby robbob » Thu Mar 29, 2018 10:01 am

1, How much can I contribute in my private pension to reduce/reclaim 40% liability?
£5,590 occupational pension contributions
I am presuming your employees contributions made are deducted from gross pay - ie your taxable pay has been reduced - calcs will be different if your employees pension contributions are deducted from net salary - Note employers contributions are non relevant.


Based on 63,205 being your taxable pay for the year and £6,000 personal payment into pension with tax relief added in of £1,500 - gross pension contribution

I am presuming you don't live in scotland and for simplicity i have presumed you will not be eligible for marriage allowance transfer

Ok Higher rate threshold is £45,000
And child benefit lower threshold is £50k


Your higher rate threshold is extended by £7,500 (pension contributions made directly by you)
so thats 45000+7500 = 52500
Your taxable income is 63,205
Difference £10,705 - 80% of this is 8564 - so you would need to put 8564 cash into pension (with basic rate relief added in ) to remove yourself from higher rate tax.
Similar calcs for child benefit

63205-50000-7500= £5,705 - so you are £5,705 gross above child benefit limit - 80% of 5705 = 4564 you would need to put in cash to make child benefit tax charge go away.

2, I am the only paid worker in our marriage with 3 children hence the need to stay below the 50k taxable pay. If I pay more and get below the 40% tax bracket can I claim part of my wife's tax allowance I think it's around 1100 pounds? Ie about 250 net.
extreme warning this allowance is all or nothing - if you are £1 into higher rate tax you loose all of the allowance transfer - so £1 of savings interest could foul things up.

I will do second post with calcs adjusted for marriage allowance transfer

robbob
Posts: 2982
Joined: Wed Aug 06, 2008 4:01 pm

Re: Additional Pension contributions to reduce 40% tax

Postby robbob » Thu Mar 29, 2018 7:38 pm

Ok part 2
I will do second post with calcs adjusted for marriage allowance transfer
The marriage allowance transfer doesn't actually change any of the calculations from my first post.

So with taxable income of 63205
and pension payments of 7500 + 10705 (both grossed up figures

basic rate limit = 45k +7500+10705 = 63205

Marriage allowance would be granted if requested and tax liability would be reduced by £230.00 - being 20% of 1150

Note £1 of any income would remove the marriage allowance completely - even if this were dividend or savings income covered by the relevant "allowance"


In summary the marriage allowance of 1150 does not extend your basic rate band by 1150 !!! - somewhat nonsensical really but there ya go.

Pensionbuilder2024
Posts: 3
Joined: Wed Mar 28, 2018 8:26 pm

Re: Additional Pension contributions to reduce 40% tax

Postby Pensionbuilder2024 » Fri Mar 30, 2018 9:33 am

Excellent Rob
Thank you for your in depth reply, the 5590 is a contribution on the gross pay into my occupational pension. I've paid a further 6000 cash net into the pru which they have updated to £7500 with the tax relief.
In short a few more thousand would gain this allowance, last few days to decide whether to put in.
I take it I get the relief back via pay in 18-19?
Andy

robbob
Posts: 2982
Joined: Wed Aug 06, 2008 4:01 pm

Re: Additional Pension contributions to reduce 40% tax

Postby robbob » Sat Mar 31, 2018 12:23 pm

the 5590 is a contribution on the gross pay into my occupational pension.
Ok - note it is taxable pay you need to use for these calcs - as per P60

It is not clear to me whether your taxable pay is £63,205 (i used that for calcs) - or whether you have gross pay of £63,205 and employees pension payment deduction from your gross salary of 5590 (or other) . In which case your taxable pay should be 57,615 and this is the starting figure you should use rather than the 63,205.

Again for clarity when you say its a contribution on the gross pay - its only your employees contribution that would reduce your taxable pay. any employers contribution is not relevant.
I take it I get the relief back via pay in 18-19?
That's not how it works.

(a) if you complete a tax return the process work via the completion of your tax return, note you can request (or hmrc may change automatically) your tax code be changed to account for "current year" tax relief on known pension payments. If this is the case the amount due back or owed out will be adjusted as appropriate.

(b) If you don't do tax returns you need to clearly advise hmrc each year what your payments were on which higher rate relief was due. ?You also need to keep an eye on your tax codes to ensure relief isnt given based on previous years figures - if for example you didn't pay in in any tax year. I would expect p800 or simple assessment calculation be done confirming all the numbers.

Normally if the end of year sums confirm a rebate hmrc will refund you via cheque or bank transfer once this is quantified.

Pensionbuilder2024
Posts: 3
Joined: Wed Mar 28, 2018 8:26 pm

Re: Additional Pension contributions to reduce 40% tax

Postby Pensionbuilder2024 » Sun Apr 01, 2018 8:09 am

Robbo
Again many thanks, I have gone for it!
Total net pension payment of £10500
HMRC informed by letter and requested 40% relief.
Hope this helps other people in the same boat especially nearing retirement, it's a no brainer. :ugeek:
Andy

rks2018
Posts: 54
Joined: Sun Sep 16, 2018 1:27 pm

Re: Additional Pension contributions to reduce 40% tax

Postby rks2018 » Fri May 15, 2020 9:03 am

I have also started paying extra into avc's May I ask is it better to pay more ie to reduce ones taxable pay to under 50k to benefit from 40 % tax relief?
My average yearly earnings are around 52k and I will be paying 1500 per month into Avc, after picking up my pension this Oct (15k per year)

robbob
Posts: 2982
Joined: Wed Aug 06, 2008 4:01 pm

Re: Additional Pension contributions to reduce 40% tax

Postby robbob » Fri May 15, 2020 11:25 am

I have also started paying extra into avc's May I ask is it better to pay more ie to reduce ones taxable pay to under 50k to benefit from 40 % tax relief?
My average yearly earnings are around 52k and I will be paying 1500 per month into Avc, after picking up my pension this Oct (15k per year)
You get more bang from your buck with any 40% tax relief compared to 20% tax relief, so if your income is subject to higher rate tax (over 50k income - adjusted as approrpiate) thats the time to be adding to your pension all other things being equal.

Whats harder to answer is whether adding to your pension now simply to claim the tax relief is a good idea if you are not convinced that having those funds in a penison pot is what you want. I would say its pretty simples for most though if they are low on overall pension contributions and want to get more into their pot - fill your boots when the tax relief is good !!! unless you feel you may miss that cash you may have had anytime soon. That's the main problem with pension contributions once its added you cant easily get back if you are younger like you can do with an isa.

rks2018
Posts: 54
Joined: Sun Sep 16, 2018 1:27 pm

Re: Additional Pension contributions to reduce 40% tax

Postby rks2018 » Sat May 16, 2020 12:41 pm

Hello, thanks,
I won't have a mortgage soon so can afford to pay in 1500pm for next 5 years. I would want to transfer the amount saved in avc pot to external provider, take 25% lump sum tax free and the rest take as drawdown over 4 or 5 years from a possible 80k pot.
Do I need to make sure I reduce my yearly gross pay to below 50k or just above 50k? As my earnings can fluctuate +/- 2k either side of 50k after I'm paying in 1500pm into avc's.?

robbob
Posts: 2982
Joined: Wed Aug 06, 2008 4:01 pm

Re: Additional Pension contributions to reduce 40% tax

Postby robbob » Mon May 18, 2020 11:48 am

Do I need to make sure I reduce my yearly gross pay to below 50k or just above 50k? As my earnings can fluctuate +/- 2k either side of 50k after I'm paying in 1500pm into avc's.?
You only get the higher rate relief based on the excess that would have ben charged to higher rate tax , you question isnt very clear but generlaly speaking if you want to get higher rate relief only add such contributions grossed up that you need to end of with a figure of exactly 50k at the end of the tax year.

Note any excess contributions will generate normal basic rate relief but to know the exact amount you need to add to get higher rae relief only you need to know your eaxt incoem for the tax year.


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