Increasing Pension to Avoid 40% Income Tax

[BobbinRobbin]

Evening all!

I'm just about to tip into the 40% tax bracket. It's never happened before so I don't know much about it, but I understand that I can avoid paying 40% tax by paying that portion of my taxable income into a pension scheme. I already have a workplace pension and cannot increase my contributions, so I'm looking at starting a private pension, but I need to know how much I should pay to avoid the 40% tax.

I've used an online salary calculator, but it's telling me that I'll be paying £177.57 in tax per month at 40% which is more than I calculated, so I'm wondering if my calculations are incorrect and, if so, why?

Salary of £60,000 minus Workplace Pension @ 10% (£6,000) = £54,000 taxable income

£12,570 Tax-free Allowance
£12,571 to £50,270 @ 20%
£50,271+ @ 40%

So.... £54,000 - £50,270 = £3,730 taxable @ 40% (£124.33 tax pcm)

Is that right? If not, where am I going wrong?

Thanks!

Second person today with this question....

For the pension enter as salary sacrifice and you get the £124.33

• auto enrolment gives the higher figure

Why can you not do AVC's (additional voluntary contributions) to your workplace pension?

You’ve forgotten NI in your calculations which you’ll be paying at 2%. I’m not sure what your objection to paying it is tbh.

If that money is going as tax, I would imagine the OP would rather the money goes to her own use rather than the gov to do as they please. Entirely understandable if you are just tipping past the threshold. And rarely a bad thing to be investing more in pension.

I would have thought you could do AVCs rather than have to set up a whole new pension though, worth checking at work.

Get an avc op. You can put up to 100% of your earnings into it if you wish. Just know it gets taxed once payable as pension.

if your employer pension is a basic Auto Enrolment pension with for example Nest these contributions are taken after tax and so your taxable income isn't reduced by the contributions

Thanks for all the replies. Pensions are a bit of a blind spot for me!

@ForbiddenColour
Thanks for that, I didn’t realise there was a difference between Auto-Enrol and Salary Sacrifice. I’m definitely on the latter.

@LittleBearPad
You’re right, I have forgotten NIC. That brings the taxable income @ 40% even lower… I think?

@ScandiNoirNuit gets me... I don’t have an objection to paying tax and absolutely believe that high earners should pay more, however if I’m entitled to pay that money into a pension scheme instead, then I’d rather do that. I didn’t start paying into a pension until my 30s, so I feel I’m lagging behind. I don’t mind paying tax on my pension income, when the time comes, if I’m earning enough to do so.

I’ve just looked and it turns out that I CAN increase my voluntary contributions to my workplace pension (I was thinking I couldn’t, but was incorrectly thinking of the employer match scheme that stopped a while ago). That is probably the easy option, however I don’t have total confidence in my pension scheme as they keep messing about with it, so I think I might like to start a private pension elsewhere anyway, to diversify a bit.

I think I’ll wait and see what my new payslip shows me and work it out from there, but you’ve given me some helpful suggestions to mull over. Thanks!

Not all pension contributions are based on the full salary. Some employers limit these to earnings between the lower and upper earnings limit - as the minimum required by law.

NI contributions don’t reduce your taxable pay.

@messybutfun

Thanks for that. This reinforces it even more in my mind that I need to see a payslip at the higher rate to see what's what.

Your NI contributions don’t reduce your taxable income.

Someone else may be able to confirm, but I don't think you can reduce tax by paying into a different pension scheme? I think it needs to be your workplace scheme, as it needs to come out of your salary as salary sacrifice.

You can have more than one pension, the pension provider generally reclaims the tax for you and adds it to your pot

I’d suggest not getting too fixed on avoiding the 40% - work out how much you need a month, what you want to spend/save, what your pension calculations look like with/without the extra contributions. Then you might end up paying in more or less than the 40% line.

One thing to consider if you’re looking at a separate pension is what age you can take it from. That’s the main reason I’ve got more than one, as my main one is quite inflexible for early retirement.

If you think this is bad wait until you hit £100-£122k and the tax is 67%!

as op have said if you can afford it yes save it in a pension (better for compound interest) or an ISA if you think you’ll need the money before 55.

I have been paying AVCs into my company pension for the last year for the same reason. I can adjust the % I pay every month through the company app, and also put in one off payments (good for bonus month).

Time to get a spreadsheet out so you can calculate how much you have that is taxable every month, as long as your taxable income < £43k (Scotland) over the whole tax year your tax will be adjusted appropriately. Last tax year I was paying negative tax for the last few months as I was putting so much into AVCs after a larger than expected bonus/payrise and they were giving me back the tax I had over paid.

You make the pension contribution from your taxed salary into your separate scheme. The scheme will claim basic rate tax relief (25% of the amount you put in, 20% of the total). If you have paid higher rate tax, you can reclaim that through self assessment.

I would suggest that you ask your employer if you can do salary sacrifice. This means that your salary is effectively reduced by the amount you contribute and it is paid into your pension as an employer contribution. You gain by not paying NI on that amount of salary and the NI amount going into your pension too. You also don't have to go through the hassle of claiming back the higher rate tax relief as per the paragraph below.

If you cannot do salary sacrifice and your employer deducts and pays the contributions for you, you will need to claim the higher rate tax back via HMRC. The same applies if you make the contributions yourself into another pension from your net pay.

I'd be interested to know what makes you uncomfortable about your current employer scheme that makes you feel the need to diversity.

Maybe I am being dense…. If you put extra into a pension to avoid paying tax, you still pay tax on it at the point of receiving pension? Okay… as I’m typing this I realise you’d likely to be paying 20 percent at that stage not 40%… So still a saving. I was being dense and answered myself ☺️

Reading all of the responses, it's terrifying how little I know about pensions! I've never really needed to know before.

@CKL987 I'm in Higher Education so it's the USS Pension. I've lost a lot of confidence in it over the years, along with thousands of others.

At the moment if you die before the age of 75 the whole lot goes to your beneficiaries fee of any tax, essentially it is a life insurance.

This week our government have buried a proposal to get rid of this tax break next April.

Free of tax!

@messybutfun

Do you mean the state pension or workplace pension?

If you open a LISA whatever you put into it the government tops up 25 percent. You can do self assessment at end of the tax year and you will get a tax rebate of extra money your employer took in additional tax.

Another benefit to paying into uss is that the employer subsidies the fees so for most (all?) funds you won’t be paying management costs etc even for your additional contributions.