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!

USS avcs are worth doing because the funds they go into have 0% fees. Check you aren't just in the fund they manage for you, there are several to choose between. Agree they have been outrageous, but I don't think that affects the defined contributions section as opposed to the defined benefit bit.

Also - you can take a 25% tax free lump sump from your pension pot from 55. So tax free going in, and back out.

That’s our plan to repay our mortgage, which is currently interest only and fixed for ten years. I fixed in July last year, and booked the rate in February last year. Am not a sage, just lucky.

What a ridiculous statement

🤣😊

Really?! 😯
FFS

57 from 2028 even though life expectancy is going down 🙄

57 from 2028
God knows what it will be by the time we get there!

@PerfectYear321 why is it a ridiculous statement?

I don’t get the angst about 40% tax on earnings over the relevant threshold.

Because higher rate tax used to be for high earners. Now thanks to the Tories freezing the thresholds and inflation being rampant it's affecting people earning very ordinary wages and already struggling with the cost of living

I'd recomend posting your question on the MSE pensions forum - and be specific that it is USS (missing that from your original post meant you might not have been getting the most appropriate responses). The MSE forum has lots of really well informed posters, and generally at least a couple who are expert (may even have worked for) sector specific schemes like USS, NHS, Civil Service (in all its variations), TP, or local Gov!

You can have an additional pension scheme if you like as long as you don’t pay more than the yearly allowance (£60k) or your taxable income into all of them.

op - higher rate tax payers need to register for self assessment to get benefit from paying after tax contributions (so not salary sacrifice) into pension. Obviously it would be less admin if you could salary sacrifice more, even if your employer doesn’t match, etc.

This applies only to defined contribution pensions- not to defined benefit pensions such that you have (it would seem).

You need to earn £50k to pay 40% tax. It’s hardly an ordinary wage.

I would respectfully disagree

It’s almost twice the average income and a £50k income puts an individual in the 60th centile.

It would be £60k if the thresholds had increased with inflation so your point is irrelevant, really. It doesn't matter if it's 'hardly an ordinary wage' -the fact is it is one of many things making people who rely on PAYE drastically poorer every year while wealthy individuals get richer. The attitude of "well it's more than I earn so be grateful" is making us go backwards in this country. Crabs in a bucket mentality.

This.
a lot of companies will put in an additional contribution for every £1 you save as well

plus costs are usually lower - you don’t see those, but they’re taken off your growth profits each year . On a company AVC they’re usually lower as financial companies gain from multiple employees in same scheme . Again sometime companies themselves help cover management costs of schemes

Erm, not entirely true, it will only go to your beneficiaries if it goes into their own pension pots
they don’t get that benefit if they cash it in as such

the actual process is that any “uncrystallised pension” can be passed on as a pension outside of IHT . An uncrystallised ensign is one that is still held in investment state and no money has been drawn as a pension form it . Government does this to stop people frazzling all their pensions before 75 if not yet needed

BUT,currently once you get to 75, legislation means that you HAVE to crystallise all your remaining pension pots .

hence why you then loose the IHT benefit at 75,

And these figures are just going off the last three years worth of inflation, which is why people are feeling it so acutely

What attitude of ‘it’s more than I earn so be grateful’. You’ve assumed you know what earn and you’re quite wrong.

People should pay taxes to support public services and not agonise over whether they tip into the 40% bucket or not.

Your post does not acknowledge that the 40% threshold has not kept up with the reality of people's pay so whatever you earn is irrelevant. You are obviously happy to earn massively less in real terms so are not among those of us unhappy about the real times loss in income 🤔

I also wish people on here would speak up. It's annoying doing it by myself when I know I'm not the only one that feels this way. I'm getting all the grief as though nobody else thinks £50k is reasonable for the higher tax threshold 🙄🤔

The thing is that it's all a bit subjective - one person earning 60k while the other stays at home pays higher rate tax, but in another household where they have two earners each on 30k neither of them does. Is that "reasonable"?

Similarly what is "well off"? Most people tend to think "well off" is someone with 2-3 times as much money as them. If you earn 20k then 50k sounds very well-off indeed. But if you earn 40k then 50k doesn't sound so rich, and you tend to think of someone on 80k as well off. If asked to pick the threshold we'd all probably pick a slightly different number.

Sorry, do you mean reasonable or unreasonable? Your previous posts suggest that you think £50,000 is unreasonable for the higher tax rate.

I think the 40% threshold should kick in at higher than 50k. 70k would be good but that's obviously not going to happen!