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!

Do you earn £69k? 😂

😂

Fiscal drag does mean that far more people are paying the higher rate, it should be higher (the threshold). The problem is that over the last few decades the U.K. has been transformed into a low wage economy and people think that anything above 30k is a good wage. We have the complexities of tax credits that means people don’t recognise that many many companies are not paying enough.

Wages that are called high on mumsnet are not, we only accept the statement because the average is so crap but does not allow a reasonable standard of living.

I earn well and pay income tax in Scotland so pay much higher than I would in England. As far as I’m concerned the social contract is broken, I’m supposed to be grateful to support through taxes but derided when me or my DC can’t access what is being funded - think university places. So I will do absolutely everything I can to limit my tax liability through legal means. For the recent changes in pension contribution I immediately set mine to the maximum to reduce my tax.

Wrong.

Pensions are outside of the estate - they are free from IHT at any age.

Whether income tax is payable depends if you died before age 75 and if the funds were either transferred or paid out to you within 2 years. Crystallised or uncrystallised makes no difference.

Death is always a crystallisation event.

Following

Some really useful information here about pensions, thank you. Paying AVC into my USS pension does sound like the simplest option, especially for things like not having to reclaim the overpaid tax and not having to pay scheme maintenance fees. I’ll look into it further and perhaps visit the pensions section of MSE, as suggested.

I don’t want to get into a debate about whether morally I should or shouldn’t pay extra into a pension scheme to avoid 40% tax. The fact is, I’m allowed to do it and that’s my preferred choice at this time.

I also agree that the high-rate tax threshold should be higher than £50,000. Maybe I feel that way just because it now affects me, but more likely it’s because £50,000 just isn’t that much any more, in the scheme of things. As a PP said, probably everyone would come up with a different number if they were to choose the threshold, so I don’t think I could come up with anything other than just another arbitrary number.

I have a frozen pension in USS and they had percentage matches on the AVC, up to 3% or 5%. It’s much better than many private company pensions. That AVC goes to a fund, unlike your career average defined benefit pot. Have a look how the AVC works now on your USS website.

I have an additional SIPP with vanguard and I would not recommend it unless you can’t do AVC with your company pension. The pension company claims the basic rate pension relief for you. The higher rate tax relief, which is what you want to not pay tax on, you need to claim back via self assessment. It is a right pain unless you are already doing self assessment for child benefit. I am so I’m familiar with it. But I think you can’t be otherwise you would have seen the questions on pensions contributions.

This is the page for AVC in USS https://www.uss.co.uk/for-members/your-pension-explained/investment-builder

That's all really helpful, thank you so much! I need to educate myself about all of this.

Not necessarily all of it, you can take 25% of your pension pot tax free from agreed 55.