Pension from net pay - reduce taxable income?

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I expect we'll need to get specific advice on DH's particular circumstances, but just wondering if anyone can help with a general answer.

DH has been given a bonus that will take him just into the higher rate income tax bracket (a nice problem to have I know). His pension contributions are paid after tax, so if he pays extra into his pension would this reduce his taxable income to below the threshold? Or not, because it comes out of his net pay?

Hopefully that makes sense. Thanks in advance!

Not if his pension contributions are paid after tax, no.

Are you absolutely sure the pension contributions are from net pay and not gross pay?

If pension contributions are paid out of net rather than salary sacrifice then it won’t help.

What about childcare vouchers- those often come off gross salary so he could maybe sign up for those to reduce gross salary, if you can use them?

We certainly put lump sums into DH pension under salary sacrifice every year towards the end of the tax year.
We actually paid from savings accumulated over the year and as long as the total paid in was less than his net pay, and less than the limit of £40,000, it was always accepted and reduced his tax liability.

You need to calculate what his earnings will be in the full tax year 2021/22

In brief- Adjust for benefits, pension contributions etc and if they exceed £50K then the excess should get 40% tax relief subject to the £40K limit

I suggest he asks his Finance Department and also delays it to the end of the tax year in case he is made redundant, is ill, leaves etc

To be fair, if he's only just into the higher rate tax bracket , it probably isn't worth thinking about.

You only pay 40% tax on the amount above £50,271, So if he's earned £50,272, he'll only pay 40% on £1.

Can he increase his workplace pension contributions under the salary sacrifice scheme?

Why are his pension contributions not tax free? I didn't know that was a thing

@FixTheBone it's less about the tax he'll pay on his salary and more the fact his personal savings allowance will reduce and he's got a fixed term saver paying out this tax year so we may well end up worse off. Still all a bit unclear because we don't know if he'll get a pay rise in January anyway, and if he does and he's well and truly in the higher tax band then that's fine.

@AuntieDolly he gets tax relief on them. So I think we've determined it's actually 'relief at source' rather than 'net pay'. Not a clue what difference that makes. But anyway, whatever he pays in the government add on 25% to essentially make it tax free.

He's spoken to his 'finance department' but it's a very small company and I'm dubious of their answers. I've told him he needs to just contact the pension company but he's being a bit of a man about it at the moment 🙄

Thank you all for your help :)

He will get tax relief yes (even if out of net pay) but he will need to do a self assessment. Basically the pension fund adds the basic rate tax directly to the fund and he can claim the difference between the basic rate and higher rate in his self assessment

If i read this right his bonus takes him over the 100k threshold and he is starting to lose his personal allowance £1 for every £2 earned over the 100k. Unless he is paying his pension through salary sacrifice it will count even if he puts a lump sum in. Only salary scrafice payments reduces your salary to below the threshold.

I’m on a pension that also provides tax relief at source. Firstly, and apologies if I’m telling you to such eggs, but has your DH been claiming his full tax relief as a higher tax rate payer? As you say, for every £100 that DH contributes, the pension provider contributes £25, but then he should also receive a £25 refund from HMRC. This refund is arranged by contacting HMRC directly, usually by cheque or by increasing the personal allowance. Any additional payments can be sorted in the same way, so your DH will just need to call HMRC to arrange the additional refund. All of this reduces your DH’s taxable income under £100k, so his full personal allowance is safe. Remember also that the personal allowance is based on taxable income, that is, after pension contribution, so the bonus would need to exceed £100k by more than his current pension contributions for this to cause an issue now. Refunds can be arranged for the four previous complete tax years (so from the 17/18 tax year), so if your DH hasn’t been receiving the additional tax relief then you’ll be due a huge refund now!

Sorry, that should be suck eggs

Thanks @2thumbs Not teaching us to suck eggs at all! This is our first foray in to the higher tax band (higher rather than additional, so personal allowance is fine) so all advice welcome. So it hasn't been relevant before but we'll definitely sort out claiming the extra tax relief this year (my DH isn't one to let the government have more than they're entitled to so I'm sure he'll be straight on to that at the end of the tax year 😂).

If it's tax relief at source then the PP who said self assessment to claim the difference between 20% tax and the higher rate is correct. And yes it will reduce his taxable income.

To make sure just check last months payslip and the taxable pay should be gross pay less pension contributions.

Unfortunately the childcare voucher scheme is closed to new entrants now as it's transitioning over to the government scheme.