Can someone please explain to me about putting more money in pension to pay less tax

[TwigTheWonderKid]

DH has become a higher rate tax payer, His taxable income for YE 2023 was £46860 and so he paid £7540 at basic rate and £3664 at the higher rate. He works at a university and has a workplace pension.

This is all new to us and normally we'd let it go because we both believe paying tax is a good thing, however, I have Stage 4 cancer so it would be good if DH could be a bit more financially secure when he retires and I'm not around.

Please can someone explain to us if he can do this and if so, how much extra can he put in ( I assume there are restrictions)?

Are you in Scotland? In England and Wales he wouldn’t be at the higher tax rate until £50k so you might get some confused responses so I thought I’d check.

Have you deducted your personal (tax free) allowance off that figure?

Yes, sorry his gross salary is £59,430

If you are in England he should hot have paid any higher rate tax. Ate you sure you have the correct numbers?

OP used his net income and listed tax amounts - gross is just under £60k.

You can contribute £60k a year to pension so no issue there.

Id suggest he puts in c18% to bring him under tax threshold.

Sorry the initial figure I gave was his salary minus his tax allowance (see I told you I am clueless!) Gross salary is £59,430

So anything he earns over 50 K he pays tax at 40%, and NI at 10%. If you put the excess salary over 50K in a pension , he will benefit from tax and ni relief at those rates. So almost 10K into the pension instead of 5K extra take home pay. Also some employers allow salary sacrifice and might also contribute part of the employers Ni that they save by him choosing this. Increasing his pot even more.

Is he in the USS? Easiest thing for him might be to just make additional contributions to the investment builder section of that if he can, rather than setting up a new pension.

If not, still look at whether he could make additional contributions to whatever his workplace pension is. Other alternative would be to set up something like a SIPP but if his workplace pension is a decent scheme there’s probably little point going outside that unless he’s really into self investing!

@TwigTheWonderKid - I am so sorry about your diagnosis and touched by your thoughtfulness and love for your DH

And so sorry about your diagnosis. It’s a very selfless thing you’re considering.

So no tax payable up to personal allowance, £50,270 less pa x 20% = £7540
£50,271 - £59,430 x 40% = £3664

I'd suggest any earnings over £50,270 put into pension. It's about 16%. Does his employer not contribute? It was my understanding that under auto enrolment the minimum pot had to be 8% (employer 5% and employee 3%) unless you opt out. You also get a govt contribution of 20%. Can anyone confirm this?

Sorry just seen your comment about workplace pension so ignore that bit.
Really sorry about your situation, take care x

Sorry about your diagnosis OP.

You pay higher rate tax (40%) on any earnings above ~£50k so your husband will be taxed at 40% on ~£9k. He could transfer the whole amount (18%) above £50k into his pension and pay no higher rate tax. You can pay up to £60k into your pension each year.

It's worth checking if the contributions are via salary sacrifice as he'll also save 2% on NI if so.

your contributions to your pension are taken from gross salary bebefore tax so if your gross salary is 60k and you have 5 k pension contributions but if you opt to put 10k into your pension you pay tax on 50k instead, you can't put in more than your salary and the maximum is 60,000 per year. normally it's 8% in total of which your employer must contribute 3% they can do more but that is legal minimum and if so you contribute 5%, so employers match your contribution up to a certain level

your contributions to your pension are taken from gross salary bebefore tax

Not always true - depends on the type of pension. Some pensions you pay contributions from net salary and reclaim the tax

Sorry I tried to edit my post and it wouldn't let me. I am used to salary sacrifice. I think you only get the tax saving, but not the Ni saving, unless you are able to salary sacrifice. Apologies.

Go onto the USS website and you can make either a one off or a top up monthly contribution

Sorry about your diagnosis

Sorry about your diagnosis OP

You've already had the right advice on how to go about this. I just wanted to addd that you don’t need to apologise / feel guilty for it. Using a pension for the tax relief isn’t ‘tax avoidance’ of any sort - it’s a deliberate incentive to get people saving into pensions so they can support themselves and hopefully not need to rely on the state in old age. Your husband is as entitled to do this as much as anyone else who can afford to.

Thanks everyone for your helpful advice and kind words. xx

You may not have thought about this but he could also look to drop a day of work to enjoy the time you have now. Because of the higher tax rate over £50k the difference in take home can be a lot less than you think. Given your situation the university may agree to a temporary variation in his contracted hours. I know its hard at university as they can expect the same amount of work over fewer days but if he is hard nosed about it then he can protect his time off and you enjoy it while you can.

Alternatives include stuffing the pension for the future or looking to maximise any salary sacrifice options like the cycle to work scheme/travel pass etc.

This is an excellent idea for next tax year - do the pension to reduce liability for 23/24 then request to drop hours for 24/25

That's an interesting idea though he works from home full time and his boss is amazing at letting him come to all my appointments without having to use any holiday etc but it could definitely be a goer once I'm not around and he'll need to be more available for DS2.

I do this with my salary. I'm a higher rate tax payer (£70k ish). I have a company car - an EV - which is deducted before tax as well as my pension. I have basically worked it so that combined after deductions my taxable salary is £43k. I'm in Scotland so that's the threshold. Works out as me putting roughly 40% of my salary into a pension. DH pays a lot less in as his workplace pension scheme is a bit crap so we basically use mine as the one to hammer money into.

I'm not sure paying more tax than you are legally required to is a 'good thing'. You should make usage of any legal avenue possible to improve your own financial circumstances for the long term, if you can afford it obviously.