I've lost sleep over this and then realized I am over £100,000 short in my income before this will ever (never) bother me :)
The fully tapered pension limit has been £4000 for a little while now.Originally Posted by craig1912
You pay a 45% tax charge on the amount contributed over your allowance which you can mostly elect to be paid from your pension fund if desired.
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Don’t quite follow. If this is reducing your salary to £100k, then you are contributing £25k in this scenario?
If you can do salary sacrifice, this is the best way as your tax relief js at your marginal rate whatever that is
If income is £125k and you pay £20k in to a pension then your income is reduced to £100k due to the £5k tax relief added by the govt.
Saying this from a self-employed perspective. No idea on the salary sacrifice situation.
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Ok self employed - not familiar with those rules
I'm not quite getting this. In my understanding you are contributing £25k into your pension therefore not having to pay tax on this amount. This brings your income to £100k therefore avoiding the tapering income tax penalty. Since you are in the 40%
bracket you are saving £10k income tax + an additional £5k by avoiding the 20% tapering. In other words you would have paid £15k income tax on the £25k had you not paid this into your pension.
And when he does take it out the tax rate will be based on his income at the time plus he can have 25% tax free, in a lump sum or monthly
Took me a while to grasp but was going through it with the accountant the other day.
My confusion was I had assumed you needed to pay in the full £25k if income is £125k but it need only be £20k. Aside from that I think we are on the same page.
This link was the best explanation I could find:
https://adviser.royallondon.com/tech...contributions/
Not sure that's true. If you pay only £20k into your pension on a income of £125k then £105k is liable for income tax. Therefore you will effectively pay 60% tax on the £5k - that would be £3k tax!
I thought the same so asked our accountants to go back and check and got this response:
I have just spoken to xxxx (he’s just got out of a meeting) and he agrees that it is the gross amount of pension that is used to work out the abatement of the personal allowance.
I have also looked at the amount used when working out the 30 tax free hours child care and this appears to be the same.
https://www.att.org.uk/tax-free-chil...r-%C2%A3100000
I think the problem with a variable tax regime and not a linear one is that it puts off ambition and breeds ill feeling. Just look at the ill feeling on this thread.
If it was 0% tax up to 15k, then 25% on everything over this, then you wouldn't feel aggrieved moving from a 50k salary to an 85k salary, or onto a 120k salary, but would eventually be paying *three times more* tax. And you might dream of moving on, without seeing the screw turning tighter on you.
A fixed tax bill like some cantons in Switzerland might also be attractive, but there is no zero rate band for low earners.
The fact that moving from 60k to 130k salary involves more and more tax, AND losing child benefit and almost all other tax benefits causes pain.
And it encourages all manner of avoidance schemes, hiding income in business expenses, not taking promotions etc etc etc. Hardly progressive and I bet the South Koreans don't have this.
But we are stuck with legacy rules, tinkering and politicians who want to fiddle, but not upset the boat.
I'm not complaining, I left the 40% band a long time ago, and for that I am happy and (somewhat) well off.
But it's flippin painful to pay so much tax. I know the people earning £1mill/yr simply pay someone to hide the income
Self-employed pension contributions are not tax deductible, which if I'm reading correctly you appear to suggest.
Sacly.
Bunch of cry babies.
No, not suggesting that. I agree that self-employed pension contribs aren’t tax deductible because they aren’t a business expense.
They do qualify for income tax relief though.
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I'm guessing they don't do that through PAYE! Agree with what you have written - it is the cliffedges that cause the challenge both in terms of understanding the implication, as evidenced on this thread, and driving the wrong behaviour.
What if you pay the £20k into your pension on 12th March, but the top up doesn't get added by your pension provider until 10th April (new tax year)?
Not a clue
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I agree with everything you have written. I have no issue paying my fair share of tax and am happy that I am in a fortunate position that means I have to pay more tax, however the non linear rules we have mean people in this position pay a disproportionate amount more of their income to the tax man, why try to earn that bit extra if 60% is taken away. It also means people have to look at ways of limiting their tax liability, this reduces tax take by the government, it’s counter productive.
I do find it unfair that tax is based on the individual and not the household unlike some other European countries.
This. Particularly when some government support is means tested. An individual could receive little to no support if their partner earns a good salary.
It’s unfair that the more you pay in, the less you get out if you need it,
How long til they abolish state pensions for high earners?
This for me. The rules around child benefit are a good example and if they were based on household income would be much more fair. You can have a household with one earner on £60K and be eligible for no child benefit and another household with two parents both earning £50K and get the full benefit. Crazy.
How would that work? Previously high earners might not even have an income when retired.
Or one person in a marriage earns £120k and pays £46k in tax and NI vs 2 people in the home earning £60k each and each paying £16.5k tax and NI so a combined £33k (£13k less than the single earner) AND only 1 state pension is getting funded with the single earner vs 2 for the dual earners.
Outrageous and I'm amazed more of a fuss hasn't been made about it
Last edited by ryanb741; 13th March 2022 at 20:34.
They'd base it on retirement income as a means tested benefit.
Can't see it myself though as they could hardly repay all the NI that was previously paid towards pensions surely
Retirement income could be low. Money in SIPs, assets (gold, watches etc).
Is NI ring-fenced for pensions, would it even need to be repaid?
Well technically maybe no but I can't imagine that policy leading to favourable outcomes at the polling booths (and we know what groups of people tend to vote more) so I suspect state pension will remain but they'll keep raising the age.
While frustrating, only a small number of people fall into the +£100k bracket, unlikely enough to get any momentum for change.
Fully expect state pension to become means tested in the next 20 years - to the extent that I am reluctant to buy extra years for my wife's stamp.
we need to clarify the difference between a salary sacrifice and regular pension contribution....
salary sacrifice is deducted from your wages prior to any tax/NI etc and effectively paid as a contribution by your employer into your pension in lieu of salary - as long as you aren't a very high earner this requires no further action as long as the total going into your pension is less than the £40,000 annual allowance. you effectively get the maximum tax relief at source and pay no NI on this sum either (win win)
if you are self employed, employed with a nominal works pension or no pension at all - then you pay your contribution from your own funds and automatically receive the 20% tax relief at source (so to achieve a £25,000 gross contribution you only pay pension company £20,000)...... assuming that you are in the £100,000 - £125,000 salary bracket this will help you retain your personal allowance by bringing your income below £100,000. You then need to complete a tax return to obtain the additional 20% tax relief that you are entitled to. lots of people paying higher rate income tax overlook the latter part assuming they do not have to do a tax return or consider it too much hassle.
anyone in the £100-125k bracket should seriously consider this as the effective tax relief (and possible NI saving if salary sacrifice) puts it into potential 'no-brainer' category
I've done a quick search but can't seem to find an answer to this.
Can carry forward (using previous years allowances) be used on a salary sacrifice pension scheme?
Cheers,
Adam.
^ 1st result on Google for me. You can carry forward unused allowances for the previous 3 tax years.
Pension carry forward rule | PensionBee
Yes it is about the amount that is put in your pot, not where it comes from
Many thanks.
Cheers,
Adam.
No specific mention of salary sacrifice there?
Cheers,
Adam.
I have as low an income as possible.
“ Ford... you're turning into a penguin. Stop it.” HHGTTG
@westberks or anyone knowledgeable on this subject:
So, if I earn £130k pa taxable (PAYE) AND before the end of the tax year I pay £30k into my SIPP.
I'll get £7500 (20% relief) added to my SIPP automatically.
I then fill out a self assessment tax return, noting this pension payment.
I can then expect a payment from HMRC of:
£7500 (20% pension tax relief)
£5028 (the value of my tax free allowance back = £12570 - 40%)
Is that right?
My only other concern is my annual pension allowance of £40k (though I can use up any unused allowances from the last 3 years)
Last edited by RoyalVilla; 23rd March 2022 at 12:41.
No, you only need to put £25k (net) into your pension and 20% tax relief will be added automatically, so your pension contribution will be £30k (gross).
Your gross income is now £100k, given you have paid a gross pension contribution of £30k. You will then be taxed on your new gross income of £100k.
You then reclaim the other 40% tax via your tax return given a reinstatement of you personal allowance.
Hope then helps.
Thank you, that is super helpful! HMRC couldn't figure out what I wanted to understand in over 2 hours on the phone, but you've cracked it!
https://www.uktaxcalculators.co.uk/ confirms this and is a useful resource for those who want to have a play.
yep, this. but you put in £24,000 as the relief grosses up to the £30,000 (-20% = 24k)
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