Tax, pension and £100k salary

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Going to premise this by saying I’m super naive about tax codes. I earn £120k and have a wild idea to put £21k into my pension under salary sacrifice, which - I think - would mean I take home more or less the same as I would get my tax allowance back and be under £100k salary. Anyone know if this actually works?

I think there’s a £40k limit per year so what are your employer contributions?

(No expert though)

I don't think it works exactly like that. The rate is effectively 60 something % though, so by sacrificing 21k into your pension, you'd only be down 7k-odd of actual cash in your hand

Not an accountant though!

Thank you. I hadn’t factored in employers contributions.

In theory that would work but it really depends on the overall situation and as pp said you need to be careful about the annual allowance, I would get some advice from either accountant book keeper or IFA. I hope you don't mind if I ask a question for my own research - what (if anything) would put you off going to see an IFA?

Well the Ifa’s I’ve spoken to have been pushy and that doesn’t make you trust they have your interests in mind (allbeit I have a sample of two!). Also time. I’m very very time poor between work and family life so getting around to sorting this is difficult

There will be maximums and things to think about as noted by others but as a broad brush answer have you tried looking at a calculator like this one?

Assuming you’re not in Scotland, your tax code works like this:

£12,500 personal allowance - no tax due. But, this is reduced by £1 for every £2 you earn over £100,000.
That’s £20,000 for you, so £20,000 / £2 is £10,000. So you lose £10,000 of you personal allowance.

So you pay:
0% tax on £2,500
20% tax on £2,500-£37,500
40% tax on £37,500-£120,000

(you would start to pay 45% over £150,000)

This is simplified, as it doesn’t take into account any pension payments, and you may have other benefits with tax and/or NI relief - such as share save schemes, childcare vouchers or cycle to work scheme.

You can easily use an online calculator to simulate your take home pay if you vary your pension payment. This example isn’t salary sacrifice but if you take the £20,000 and pay it into your own personal pension at £1667 per month. It’s just to give you an idea, as I can’t account for your exact circumstances:

£120,000 salary = £74,139 take home
£120,000 salary with £1667 per month (£20,000) put in a pension = £66,137 take home plus £20,000 in pension plus £13,336 added to pension by HMRC.

So you lose £8,002 in take home pay and gain £33,336 in pension.

Honestly, I cannot understand why you have not spoken to an IFA. If you earn £120K but don’t understand tax codes, it’s the obvious thing! They’ll save you more money in one meeting than you’ll pay them.

Agree with PP that you need to watch out for the annual allowance - but you can carry over some unused allowance. I won’t post all the rules here - go see an IFA!

www.moneysavingexpert.com/tax-calculator/

I like the MSE calculator as it also allows you to add your pension contribution.

Are you so time poor that you can just piss away tens of thousands of pounds?

That’s worth taking a day off work for, to create time to get your head around it.

Cross posted that I’ve seen you have seen 2 IFAs.
Did they give you completely different suggestions, or basically the same thing but you felt pushed on products?
There are other options - but for a higher rate tax payer it’s hard to beat the tax relief on pensions.
I would imagine both suggested pensions, but then you felt pressured on which pension provider and funds they recommended?

Just remember that you can set up a pension on line instantly. You can choose a low risk fund - the providers will rate the risk. You can then set up a standing order into it, and HMRC will credit you with 20% tax relief into that pension immediately. You do nothing - your pension provider sorts it out with HMRC. So for me, in an Aviva pension, I pay in £500 and the very same day it goes in, my balance is £625. (20% of £625 is £125, take away the £125 takes you back to my £500).

I get my additional 20% (I’m a 40% tax payer) too. You can do this via self assessment, but I had my tax code adjusted instead. Literally ONE phone call to HMRC where I said “I’m paying £15,000 into my pension myself, this year”. They change my tax code - so that I have £12,500 allowance + £15,000, before they start to tax me via PAYE.

You can set up a low risk, low fee fund in minutes online.

I knew that an IFA could give me more tailored advice on better funds, but I wanted the tax relief ASAP. You don’t have to wait until you are sure about funds or IFAs to act.

If you decide in 3 months time on a better option, you have:

• locked away a fairly small amount in a pension, not a life changing mistake
• can move it to another pension if you want
• have already benefited from some tax relief

You do need to check your closeness to annual allowance. But that’s not hard to do.

Thanks for answering my question - it makes sense. I'm an IFA and I always wonder why people are put off from seeing an IFA but I do understand exactly what you are saying about them being pushy! I sometimes dread going to conferences because I have to sit in a room with a lot of other IFAs!! If you find a 'planner' someone who talks about goals and objectives they will be much better for you than someone who just wants to sell you a pension! Plus you might find someone who can do a telephone or video initial conversation. Although calculating the tax can be as simple as using a calculator you need to be mindful of the adjusted income income figures that the tax office use to reduce the annual pension allowance (tapered allowance)

I have suddenly gone from earning fairly sub-100k through simple income only to next year earning 150k or more split across income, stock awards and dividends on stock awards. I know I need to see an IFA and I do want to but I don’t know where to start on finding someone and how to be sure I can trust them. I’m also quite left wing and don’t want to minimise tax especially, but want to make sure I don’t mess up my finances through ignorance (eg I’ve just been learning about pension relief tapering) and also want to be sensible about financially planning for the future as I’m not sure how long I’ll be in this income bracket. At the same time I’m not bothered about putting masses into my pension as it’s already building up pretty well and I won’t need much to live on once my mortgage is cleared and my astronomical childcare costs are at an end.

It’s a bit of a minefield for a someone who never expected to earn so much and doesn’t come from wealth!

Feelingchipper well done on your promotion and/or payrises! To find an IFA I would see if any friends have got recommendations for someone they have already seen. Google advisers in your local area as well. I think you will have to meet someone to know if you trust them though

Or there is an investment section forum on moneysavingexpert with loads of IFA's on, some who have posted for many years. They might be able to recommend IFA's in your area.

We have used several IFA's over the years - one cost us literally thousands of pounds through poor advice, so I really am skeptical.

However, we saw someone a few years ago and paid a lot of money for them to review our various pension pots etc., and they advised on how we would be best to invest for our forthcoming retirement. Although we sometimes have to push back when they seem to be encouraging us to put everything under their 'umbrella', generally we are happy with the guidance we've been given.

It is a minefield though!