£100k tax threshold and pension contributions

[greg-b]

Hi

I've been fortunate enough with available overtime this tax year to be in a position where my income for 19/20 has exceeded £100k. Only by a short amount though. For arguments sake, say £2k. So my personal income, from my only job, for 19/20 is £102k.

From reading up on the situation, I calculate that by doing nothing, that extra £2000 will cost me an extra £400 in income tax as I'll lose £1000 of my tax free allowance (£1 for every £2 over £100k). So 40% tax on £1000 is £400.

Firstly, am I correct in this assumption?

Secondly, how could this work? From my understanding, I am able to prevent this situation by reducing my taxable income below £100k. This can be achieved by a pension contribution I believe? But, as we're so late in the day for 19/20, I'm not able to arrange this as an employer contribution.

I am though, able to make a payment into my pension using my debit card and the payment would be near enough instant.

Would an employee pension contribution of this type enable me to reclaim my personal tax allowance in full?

I would need to complete a self-assessment for this though?

Have I got my figures correct? A single £2000 payment into my pension would save me £400 in tax?

Cheers

Greg the noob

[robbob]

Firstly, am I correct in this assumption?

Yeppers - your effective rate of tax is 60% practicably speaking the 40% deducted elsewhere (presuming you are paye earner) and the 20% extra charged ref loss of personal allowance.

Secondly, how could this work? From my understanding, I am able to prevent this situation by reducing my taxable income below £100k. This can be achieved by a pension contribution I believe? But, as we're so late in the day for 19/20, I'm not able to arrange this as an employer contribution.

Presuming it doesn't go against any of the allowable reules as to what you can contribute where, then generally speak there is nothing to stop you adding yourself to a personal pension you may have or creating a new one to add to. all i would say is if you are contributing to some sort of final salary or company scheme specifically check that its ok to add elsewhere in the same tax year before you do anything. You may be able to add to the pot you have already too - ask if that is possible. Also check lifetime limits etc.

I am though, able to make a payment into my pension using my debit card and the payment would be near enough instant.

Ok - sounds like your solution is reasonably simple in the above example you would add £1600 cash contribution from your own pocket , with added tax relief (20% of grossed up value) of 400 - making gross contribution £2,000.

Would an employee pension contribution of this type enable me to reclaim my personal tax allowance in full?

Yes - with the benefit that you should be able to avoid the requirement to complete slef assessment returns too (unless you are already doing returns for other reasons)

Have I got my figures correct? A single £2000 payment into my pension would save me £400 in tax?

Practicably speaking the benefit will be 60% of the grossed up amount added to your pension (presuming your grossed up contribution doesnt exceed 2k) as that is your effective tax rate.
Note ensure you make it clear you are eligible for the hmrc adding in the basic rate tax relief automatically into your pension pot.(If your scheme doesnt allow that and you need to add 2k gross then you claim the extra 205 from hmrc directly - its very unlikley that the 20% wont be added in automatically)


To add 2k gross contribution personally you - pay £1600 cash contribution - hmrc top up by £400 - so 2k in your pension. You get higher rate relief of 20% of £2000 (£400 tax rebate) by advising hmrc of the £2000 grossed up contribution you have made. Finally you avoid paying 40% tax on £1,000 that would have been charged due to removal of personal allowance (£400 less tax than woudl have been charged otherwise)

so your outlay is £1600 cash and you get tax rebate of £400 and avoid tax bill for £400 - making the cash cost of the £2,000 in your pension £800.
£2000 * 60% = £1,200.

[greg-b]

Thanks for your advice although I am still a little confused.

As it's late in the day I fired this question onto a couple of forums and, whilst I've had another suggestion that a £1600 payment is required, the HMRC forum suggested just £1000 (https://community.hmrc.gov.uk/forums/customerforums/pt/18b53f60-c772-ea11-99e5-00155d9c8f13 )

Can anyone explain these differences, I've still no idea how much my payment needs to be.

Many thanks

[robbob]

As it's late in the day I fired this question onto a couple of forums and, whilst I've had another suggestion that a £1600 payment is required, the HMRC forum suggested just £1000 (https://community.hmrc.gov.uk/forums/customerforums/pt/18b53f60-c772-ea11-99e5-00155d9c8f13 )

if you income is 102k you need to get 2k gross into your pension to avoid paying the higher marginal rate its as simple as that - so £1600 cash added by you should be grossed up to £2k being added into you pension and 2k will be the amount you can reduce your adjusted income down by for these calcs.

Can anyone explain these differences, I've still no idea how much my payment needs to be

.

If you then made a Personal Pension Payment to match this deduction then you would still lose your Personal Allowances but the tax liability would be offset by the Personal Pension Relief that you would claim which would match it.

The responder here has done a different calculation i think to get to gte to some sort of cahs neutral sitautaion by clawing back tax or summit - i think, they have confirmed basically that your income would still be 101k in their calc and over the 100k threshold.

i am pretty sure though your intention is to avoid all the tax at 60% effective rate charged and get your income below 100k - and possibly avoid the need to submit a tax return - so you need to add the 2k grossed up - 1600 cash cost net into your pension to do that.

Note other minor income like bank interest received could take you over the 100k tax return obligation scenario, so ensure you add enough into your pension if that is an issue - note although small amounts of intterest income will themselves be taxed at 0% - they are taxable income and will generate a tax liability by you losing your perosnal allowance and triggering.

PS don't fortget to ring hmrc and confirm level of pesnion contribution made if you are not within sa, be very explicit in confirming net and grossed up sums so there is no confusion. Note they may well adjust your tax code going forward to preusme you will make similar contributions so keep an eye on your tax code and update them if your plans change. Not so much an issue if you do tax returns.