Can someone please help explain tax efficiency and pension?

[ChangePlease]

I have recently moved into + £125k and as I understand it aAm therefore subject to 45% tax and loss of personal allowance.

I’ve heard about people putting more in their pension to be more tax efficient - does this mean I can basically bank anything over £100k into my pension fund (to make it eg £99k) and put me in the under £100k tax band? Sorry if this all sounds a bit thick, it’s all new to me and I don’t know much about tax stuff

Short answer is yes.

Basically yes. What sort of pension scheme do you have at work? Does your employer offer a salary sacrifice scheme?

@jayritchie what do you mean by what type? They match my contribution after a certain % …

See an ifa you need proper unbiased advice

You can do that by setting up a personal pension.

Or you can ask your employer about a salary sacrifice scheme.
In a salary sacrifice arrangement, an employee agrees to give up a part of their earnings so reducing their overall salary. The employer agrees to pay these ‘sacrificed’ earnings directly into the employee's workplace pension.

Both employees and employers benefit as they are then subject to lower National Insurance contributions. The employee also reduces their income tax burden.

You've got the right idea, OP.

Ask your employer what percentage you can put into your workplace pension monthly (will reduce your taxable earnings). Great that they match contributions.

In some industries where bonuses are a thing, you can also ask for a bonus sacrifice arrangement.

You can also go on a platform like Hargreaves and set up a SIPP account, but sounds like you should be able to achieve the desired effect via your company payroll.

And congratulations on your pay rise, BTW!

There is currently an annual allowance of £60k a year that you can put into pensions without being penalised by tax charges but as long as you don't go over that you're fine.

Yup. Remember that allowance includes employer contributions also, not just what you put it.

Keeping taxable gross under £100k is key at your salary level.

This already is frying my brain. I maybe will make an appointment with an IFA, I don’t trust myself to do the sums correctly

You may get better value from an IFA or even avoid the need for one of you do some reading first.

for example this https://www.moneyhelper.org.uk/en/pensions-and-retirement

and specifically this https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/tax-relief-and-your-pension

But I think step 1 is probably asking HR what's the max you can contribute to the company pension plan.

hi - the two main types are defined benefit schemes (generally the ones used in public sector jobs) and defined contribution which is the norm for private sector jobs. There are a few less usual arrangements as well.

For my company pension plan I change my percentage contribution to max contributions - you might be able to do similar, I just make sure that - matched contributions (mine plus employers), plus additional over that do not breach the 60k.

Yes that is it exactly. Put in the excess over £100k into your pension via salary sacrifice - this is the important bit.
The limit you can put in includes your and your company's amount up to £60k.

I put in the max every month.

sounds like you may have been a 40% tax payer for some time previously if you have just had a salary increase to above 125k. Have you been paying more into your pension already? If not you have been missing out on some pretty significant tax benefits.

I do this but lower tax band. So I salary sacrifice 40% of my salary into my pension scheme. I also have a car lease through work which comes off my salary before tax. So I've got it to a point where my taxable pay is £42k so just below the £43k threshold (in Scotland) for 42% tax

@Hitchens yes I think I have been completely oblivious 😢