Financial planning, pension and tax query, young employee.

[LottieLA]

This year I have had a wage rise, putting me just into the higher rate tax band for the first time.

HMRC have been in touch to say I've paid too little tax this year so, of course I owe money back to them.

Is there a way for me to lower my tax bill by the end of this financial year?

What should I do next year which will help with my future financial planning? Thinking pension perhaps?

Would this impact negatively on my employer?

Thank you.

Pay into your pension or give to charity via gift aid?

As in an additional contribution (AVC) or through my employer?
How do I work out how much?
Can this be done this financial year or am I too late?

You can reduce your gross pay by putting more into your pension, assuming you want to do this to avoid 40% tax you need to reduce your gross pay to come under the threshold. You will need to do this by 05 April. You'll need to take your gross and deduct current pension contributions and any other non taxable benefits such as additional leave etc. You could make extra contributions through additional AVCs, by 05 April. Payroll can confirm your current net pre tax salary to date if that helps, the information should also be on your payslips.

You can ask your employer about AVC's or you can set up a SIPP (Google for details). Then pay in enough to bring your taxable income down below the threshold. Dont forget for every 80p you pay in the government will add 20p in tax relief automatically. If you have already paid a bit of tax at 40% you can claim back the bit between 20% and 40% after the end of the tax year.

You will need to decide how to invest the money you pay in but if you don't have confidence to do this yourself there are a lot of platforms which make this more simple.

Have a look at Dodl which is one of the cheapest.

You will need to pay in before 5/4/25 so you still have time but not much.

Thank you both!

I think you are confusing the pension contribution options.

paying into a SIPP doesn’t reduce your taxable income, it extends you mr tax bands by the gross amount. So, 10k contribution will be added to you 37,700 20% increasing it by 12,500. If you are a higher rate tax payer, as you correctly say, claim back the additional 20% via a tax return.

If your avc can be taken via salary sacrifice then you don’t get a 20% ‘uplift’ because you save 20/40 % in not having actually ‘earned’ the income, plus you save NI, and if applicable reduce the childe benefit tax charge

This is the time to consult a financial adviser.

You don’t have a huge amount of time, assuming you get paid monthly. When did you get the pay rise, and did you get a tax code change at the time? How much into the 40% tax bracket are you? You’ll only have underpaid tax on that portion. Does your employer operate a salary sacrifice scheme for pension and do they allow for one off payments?

FWIW I always end up needing a tax adjustment but they tend do do it over the year, so it’s not really much of an impact. And my tax code has just been incorrectly changed. If you haven’t paid enough tax it’s because they haven’t changed your tax code to reflect pay rise, but it could equally be that they think that the amount you have been paid last month for example, reflects how much tax you should have been paying every month. You could ask your payroll dept to confirm what your taxable earnings will be after month 12 and work out if the underpayment is correct.

Longer term though, if you can afford to, salary sacrificing some of your earnings into your pension to stay under the tax bracket is definitely worthwhile.

You haven’t got until 5 April to sort it out if you want to increase your pension contributions via work PAYE though, you’ve only got until your company’s payroll deadline.

@fromdownwest so how does that work if I want to pay in 100% of my salary which is the limit for receiving tax relief. Everything I have read implies that this is possible and you can effectively get more tax relief than the tax you have paid.

If I use your method then tax relief would not be given if my contribution is more than my salary less the nil rate band.

Eg if I earn £20k I understand I can pay £16k into my pension and get £4k tax relief even though I only paid £1486 in tax.

If I use your method then I would only get the £1486 in tax relief.

I think I’m more confused than when I started…😵‍💫

I don't think you could salary sacrifice 100% of your salary as you would then not be earning the minimum wage. But you could pay 100% of your salary into a SIPP, get the 20% tax rebate at source (and reclaim for the gap between 20 & 40% tax if applicable) by way of a tax return.

Agreed, if you want to put a lump sum in before the end of the tax year, then a contribution to a SIPP (or your work place pension) as an after tax contribution.
You will receive an uplift to your basic rate band.

In your example, you are receiving the same tax relief. One scenario you see it added to the pension to gross it up, the other, you are paying less tax in your monthly pay (and Less NI)

Ignore me as I am responding to @fromdownwest with a hypothetical example.

@EmmaStone agreed, I was referring to a SIPP contribution not a salary sacrifice.

So, simplified from advice above.

I can pay a lump sum from my wage into an AVC or SIPP as long as my payroll can arrange for this to happen before 05.04,25.

The lump sum would take my earnings down so that my tax is not at the higher rate.

From then on I can pay monthly into the AVC/SIPP.

Is there anything else to consider.

Yes that's about right except your payroll won't organise the SIPP payment. You will need to open a SIPP and do that yourself.

Correct, but they will be unable to drop you below minimum wage.
So the amount you can pay in via an AVC will be limited.

If you would like to pay any more into this, then you will have to do this from any cash savings.

You may be able to make a payment into your workplace pension scheme this way, and you could contact the provider to confirm (L&G, Standard Life etc)

This payment will extend how much you can earn at 20% - extending your basic rate tax bracket. You will also have the 20% added to your contribution at source.