How To Save £1,000s in Tax Before 5th April (Spring Budget Changes)
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- Опубліковано 16 чер 2024
- HMRC Adjusted Net Income Guide - www.gov.uk/guidance/adjusted-...
My Guide - james-shack.co.uk/adjustednet...
Financial Planning
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00:00 Intro
02:04 Biggest Missed Opportunities
02:53 Pension Recap
04:27 No Income or Retired
06:51 £50k - £90k
09:59 Important Message For Everyone
10:31 £50k - £90k cont
12:02 £90k +
15:13 Where Everyone Gets It Wrong
16:12 Pension Vs ISA
17:23 Helping Family Members
I really hope this helps save you some tax - it took a long time to put this one together!
I've started my Newsletter back up. In next weeks, I'll be sharing more tax year-end tips like this, so if you found this video useful, make sure to sign up here: james-shack.co.uk/newsletter
Hi, I came to this conclusion about SS through DC pension within my pay packet to put the money that I would be paying 40% tax on by just going over the threshold through not raising the limits each year, the “physical drag” as they call it.
Now with retirement around the corner I can pay a bit into my DC pension.
I’ll health is raising its head so may have to fully retire at 55 or before 60 and rely on this money to make it to state pension age.
That assumes I live to spend it, if not the wife will get it, but not the tax man.
Take care M.
You forgot to talk about the pension taper, which is 70% marginal tax rate. But I understand there is really nothing that can be done there
@@davidcooks2379you’re lucky to have huge earnings to be caught by the taper lol
Phew! I can imagine it took a lot to put together. I had to rewind multiple times for each example to sink in! Apologies if this is a dumb question but how are the effective tax band percentages calculated, eg. 50-60k @ 60%. Is the effective tax due to a loss of child benefit (7 mins)? Feels odd that tax % is mixed with government benefit?
Thank you James 😂
What's absolutely criminal is that these bands aren't moved every year in line with inflation.
All part of the plan to recover the billions that Covid and Ukraine conflict and the fuel support schemes have cost the Government. It has to be repaid somehow
The tax man knows that people don't see these bands as moving down with typical wage increases and inflation each year.
Politics. “Freezing tax bands” is the stealthiest way to increase tax. It even sounds like it could be a positive thing.
It’s called fiscal drag and it’s 100% a deliberate stealth tax
How long has it been since that "4 year freeze" of 12 500 allowance. At least I'm sure it was gonna be 4. In 2013/14 it was 10000, then next year I THINK it jumped to 11000? Then maybe 12000 and finally 12500, I've been waiting for a raise for 7 years? and the 12500 is still supposed to be frozen? I might not be completely right but I'm sure it's been YEARS
It's maddening to think of all the extra tax that has been paid and benefits that families have missed out on, just because no one explains this stuff to us!
they shouldnt have to be told...the system should be simple enough to just be fair to all. Stuff of fairytales, of course.
It is done to us on purpose
The sad truth is that if EVERYONE was super tax efficient then the govs tax income would reduce, so they would end up putting up tax rates to increase income.
How can one pay into pension of their spouse? Is that from taxed income? Or can it be done pre tax?
@@dukmo4216 This has to be a personal contribution.
You are doing great work and I can't find information and examples this specific and relevant to myself anywhere else, thank you for continuing to publish it.
This is the best and most useful summary for these challenges I've found. Thanks so much for laying it all out so clearly along with the common issues! Calculating exactly where I'm going to fall and whether Ive done enough or not is so stressful!
You're very welcome!
One thing you could do is just overshoot the mark comfortably (if financially able of course). So instead of aiming for 100k and risking falling the wrong side of the mark, aim for 95k and leave yourself ample wiggle room for anything unexpected. You would still be getting 40% (42% salary sacrifice) tax relief on the extra 5k, and extra money in the pension pot, plus the peace of mind.
One of the most lucid narrators on this sector on UA-cam. Very useful.
Thanks, I'm glad you find it useful!
Mad useful! Props for putting all this together James.
What an absolute gem! Exactly what the doctor ordered. Clear & concise. I've subed & liked. Keep 'em coming mate👋
Thank you so much James. I've found all of your videos incredibly helpful and have started to use the concepts you describe.
That’s great to hear!
This is the clearest explanation I have ever had on this. Thank you very much. You just saved me a couple of grand and stress
This is a wonderfully simple guide to pension savings, everyone should watch it!!
It is madness that the amount you get tax free on childcare hasnt increased. It cost 21k full time nursery care and it's only 2k and remained the same for years.
Your wife should be looking after your kids not a bored teenager on her phone all day
All of this is even more important in Scotland, where we pay 42% on income over £43k and 48% over £125k, and starting in April we'll pay 45% on income over £75k too
I was about to mention exactly the same thing. The marginal rates in Scotland are really severe, especially between £43.6k and £50.2k where you pay 42% Income tax + 8% NI (from April 2024) for a combined effective rate of 50%!
Why are the rates higher in Scotland, and what benefits do you guys get from the increased hit?
@@sozilla SNP anti-business politics, playing to their base. Very little additional tax is raised (as their own advisors warned them) because people - especially the better off - seek ways to avoid tax. It also adversely affects our Barnett funding. It's just really ignorant politics that actively harms Scottish people and Scottish public services.
I'd say move to England but it'll be the same or worse here when Labour win the next GE... isn't socialism great?
@@kw8757 Rachel Reeves has hinted that she would like to reduce taxes on higher earners. Hopefully a UK Labour govt would put pressure on a much diminished SNP (noting that the SNP's previous finance minister has also openly criticised their current tax policy)
Hi James! I am an old friend of your Mum’s and am now a subscriber! Thank you for your advice!
Man, I’m so glad I’m learning all this stuff relatively early!
An excellent summary of our rather bonkers tax system and some great ideas! Thank you James
I got to say, these charts you keep popping up are golden for interpretation! Keep up the good work
It’s nice hearing you talk about the 60% tax after 100k. No one seems to know or speak of this stealth tax window. It makes no sense and needs fixing
Window? Sounds like something that needs extra taxation.
@@JamesChurchill3 ffs let’s penalise those that have done well shall we?
James, thank you so much! This was helpful! I have an ISA but I am also considering SIPP.
A sip can be mighty useful!
For me it’s about not paying 40% tax on the small bit that goes over the threshold.
It also lets you invest the money and know it is there, or share will be.
Take care M.
Brilliant video. Some of this stuff I was aware of but there's still some very useful bits in there for me.
Hi James, this is really helpful, what is think needs to be clear at the moment is that although today there is no pension lifetime allowance, it seems that it’s a labour policy to bring that back and it’s also the case that those people at or over that £100K earnings threshold are the ones most likely to be impacted with that if it does come back. So to some extent I think we need to be cautious about making the statement that pensions are almost always better as an investment as although that may be true today, it may not be so in the future, in particular if the lifetime allowance is finally lower than it was before. Of course it is speculation that the allowance would definitely come back, but i do think it’s something to keep a close watch on as it would significantly change the impact of tax on pensions.
Thank you so much for putting this together James. Absolutely top rate video.
I'm a bit of a nerd on this so I was already aware of the topics covered, but you've presented this beautifully and in a way that is clearer than I've seen elsewhere. It's so important to highlight because if everyone understood this I doubt they would describe the current system as fair, with it's tax cliff edges.
For now, those of us impacted can play with pension top-ups to mitigate but long term there really needs to be a strong lobby for smoothing the marginal tax rates out in a more progressive way. We are in danger of talented, aspirational people getting to a point where it feels like there's no value in earning more, and when that happens the economy, and thus everyone, suffers.
amazing you have just saved me at least 7k thank you and keep the videos coming
Excellent advise as per usual, I'd have missed the taxable benefit element too eg. Bupa although (luckily?) I don't get those..
Exactly what my accountant advised - I will be over the 100K limit by about 20K, and was advised to stick that 20K into a pension.
I'll actually put in 25-30k (as I am over 55 and can take some back out if I find myself income-poor for a year).
This will mean that the final balancing tax bill for me will go from my owing the HMRC a few thousand to them owing me several thousand.
That plus I'd much rather my earnings were paying for my retirement tomorrow rather than on interest for yesterday's COVID payout loans.
you think you're smart but HMRC are shafting you for tens of thousands anyway and you will see very little of that in return. Much better to move to a 10-19% tAX regime elsewhere in Europe if your work allows it. yOU WILL STILL PAY >30K IN TAX/ni
Watch out for MPAA which may be triggered if you draw down on your pension in a poor income year as this would restrict tax free pension contributions after that point.
Once you crystallise your pension, you can barely contribute anything to it after that. Don't draw from it without serious forethought
As above, sounds like you misunderstand the ramifications of 'take some back out', worth looking into that as really you shouldn't touch it until you actually retire. Also if I were 55+ and earning £120k+, and on assumption you think your retirement won't be too far away, I'd be absolutely loading the max I can into pension. You're saving tons of tax and you'll have access to the pot soon anyway, seems a no brainer (of course if your expenses allow, but hopefully they do).
Are you not able to contribute pension for previous years if not used up full allowance. Anything to save tax is a no brainer
Wow what a content.Brilliant work
That child benefit hack is a no brainer - not enough people know about it. I encourage friends/family to do that if they can afford to. A big misconception is if salary over £50k, then they start to lose some child benefit....they don't realise its "income" over £50k.
Taxable income.
If say you had salary of £75k and pay 20% into pension (£15k), should you be fine to claim Child Benefit from April 6th 2024 as your income is 60k?
@b-m-c yes,.in that instance you would be able to take the full benefit and at the end of the year (April 2025) you would pay zero back on the child benefit, as your p60 would say taxable income of 60k
Great video, James, as usual.
A small note on minute 3.25 - the pension provider will add 25% (not 20%) to the amount you contributed. You calculated it right though.
On a side note, I am seriously thinking of changing countries as this taxation system does not allow a motivated family to critically improve their status if they are working as employees and there is no wealth passed from previous generations.
Always great content. Keep up the good work.
I will, thank you!
Hi James, great video, thanks. One question: in your linked guide, in Step 3, you say:
"... we deduct pension contributions that you have made with money you have already paid tax on.
These types of contributions include:
- Personal contributions to a private pension (such as a SIPP)
- Contributions to a net-pay workplace pension scheme".
I believe that you mean to say "Contributions to a *relief at source* workplace pension scheme"? Net pay schemes deduct the employee contribution before tax.
A video with some illustrations on net pay vs relief at source vs salary sacrifice would be really good (although new to your channel so may have missed it!)
Thanks. I have jsut decided to retire at 57 having done pretty well on the investment side but how to now get at those funds as tax efficently as possible is a minefield to say the least. Like your example I had planned to live off ISA's for a while and leave my pensions alone but taking the £12k+ personnal allowance makes sense.
Thank You
Great video, James! I’ve just shared some of it in a vlog I’m filming today to help my audience find it. Really helpful and concise!
Bringing down that taxable income is so important, but shocking to think these bands aren’t being bought up in line with inflation and how much we need to earn these days to live the same life we did 5 (+) years ago.
Thanks again for the great content ❤
As always good information.
Really practical, thank you
Nice one - great advice 👍🏼
Thank you. I agree its nuts that more isn't taught in schools. (Work colleagues and myself recently ran a few school workshops as part of a financial education programme my employer - a bank not an education provider - provides, but there really is such a gap in this area of education).
This is good. So many folks don’t understand money it’s outrageous.
great informative video, thank you
Great stuff, very informative.
You did something similar last year. I am drawing my pension now but followed your advice and put £2880 into Vanguard funds. The taxman made it up to £3600. That £3600 has risen to £4060. Goes without saying that I shall be repeating this in April.
Top lad as ever, liked and shared!
I am planning to do the child benefit game come 24/25 - for 9 years and now 3 kids my wife has claimed zilch even though she hasn’t been working purely because I was in the annoying bracket just above £60k - I feel comfortable in increasing my pension contributions but hadn’t considered doing it as an ad-hoc payment at the end of the year which was making my head hurt so thanks ☺️ 👍
Same here, or rather I would, except too late for me as my children are all older than 20 years old now (but did get some child benefit in the earlier years before the taper off rules started in 2013)
Thanks James. This is really timely as I'm paying into my pension bringing my taxable income to just below £50k. But I may get a bonus this month which may start to affect our Child Benefit contributions, so I'm gonna pay a personal pension contribution, which I has no idea about.
I'll be doing this.
Cheers!
👍
just saw this comment the threshold has been increased to 60k for child benefit contrib in the uk from the following tax year next month. just thought id let you know
@@shaylendutt8836Thanks, however isn't that increase for next year 24/25? This will be for 23/24
Edit, just re-read your comment. Thank you for the info. I can adjust for next year. 👍
I've claimed a tax refund on personal pension contributions without having to submit a self-assessment return. I just spoke to someone on the inland revenue website through their text chat feature, gave them my details and explained what I'd done and they said they'd adjust my tax based on that. Got a cheque in the post for the tax I was due a month later.
Well this has been a helpful video, recommended by the UA-cam algorithm! Thanks!
Hi James, could you do a video about investing money in shares v in property? Im stuck between the 2 and would love to see your iconic breakdown of the above problem!
I left my job due to 60% bracket. I no longer utilise my global level skills in the UK. Instead I live off investments. My knowledge and talent is wasted and their is ZERO point working in the UK. GO OFFSHORE
Where do you live now?
If i could give more than one Like i would. I've made many changes to my pension and investing through your videos such as calculating my expenditure and calculating my future pension requirments with your spreadsheets, adjusting my pension contriubtions to ensure these requiremetns are met, using platforms and funds with lower fees to increase the amount that is left in my pension. Many many thanks
I like this vid, Good insight and interesting.
Excellent video.
This was very helpful thanks James and is a some real food for thought. I'm a simple public servant myself but my partner is self-employed and a relatively high earner though she's noticeably made less this year than the previous year which means the £100-125k window is very much in play. I had forgotten that over £125k you lose the 0% allowance so I might now give a lot thought to putting more into her private pension than previously planned, particularly if most of that money is only otherwise going to the taxman... I might also get our tax-free childcare entitlement back too which would help as we are very much in your example of the 2 kid household.
This is great advice, the only infuriating part is how poorly this is managed by HMRC. You're required to speak to someone every 3 month renewal of tax-free childcare to confirm your adjusted income will be below the limit - and for us (and others I gather) sometimes it's just (unrightfully) refused outright - so having to take it to Mandatory review to get it approved (which takes weeks to sort). The main problem being on their system they can only see your salary, and not the extra pension contributions.
That sounds really frustrating. I'm guessing salary sacrifice pension contributions would be visible to them but not private contributions?
Yes, I should think so. They seem happy to take it on your word when you confirm by phone you're making contributions and know what you're doing - but you have to get put through to the "Eligibility" team first though who understand.. (I've been told by the first line that if your salary is a pound over you don't qualify!).
The child care hours aren't related to income, you just need to be in work
@@seancrowe3353that's the base 15 hours, to get the full 30 your salary needs to be under the threshold
@@seancrowe3353that's the first 15 hours, for the full 30 hours its based on adjusted income under £100k
fantastic video! new subscriber here! great advice
This is really great, thank you. If you could do a focused video on £100k plus salary and no child care considerations that would be great. I need to go back and watch this again, slowly, to unpick the childcare. I'll look at your materials as well. 👍
My main concern with pensions is retirement age. Kinda crazy the government effectively locks you into a contract whereby the goal posts are persistently extending. I'm in my 30s and worried retirement age will extend well into the 70s - and with a mixed picture on life expectancy (likely due to NHS floundering) it does make me a bit anxious and wonder if should live for now than later. Would be great if you made a video on that topic James! 🤔
This makes it even more important to take control of the situation and retire on your own terms, not theirs…
Put away in a pension what you can afford & not miss today. Keep doing this for the next 40 years.
It's a balance of living for today, but saving for retirement. I did just this 37 years ago with money I did not miss. Bloody glad I did too. My pot currently is £445k. I have been drawing down on it the last 5 years.
Great video!
Great video James, even though with grown up kids the savings related to child allowances etc has no impact, nor childcare.
Some would say nice problems to have if your earning £50-60K and then over £100K,
I would love the Government to develop the auto enrolment of pension to also Include allowing salary sacrifice. Last company I worked for would not allow this, and also offered no matched payments other than what they had to pay.
I had through a previous job been making salary sacrifice and that company gave us the NI savings and also enhanced matching of contributions upto 8%.
You would think as the Governments have always wanted to reduce the costs and numbers of the public sector they would overhaul the tax system making it much simpler, possibly saving many roles in HMRC.
The whole system needs overhauls as already it’s reported far more benefits go unclaimed than are lost to tax evasion.
Hi, thank you for this. Would deduction of £312 working from home and mileage claim difference from what employer pays v hmrc allowance come off this as well?
So add private medical but deduct these?
Any chance you could do the same sort of analysis for Scotland? It’s getting hella confusing up here with all the rate changes . . .
It’s also absolutely ridiculous income tax is higher than capital gains tax. Doing nothing to make money should never be taxed less than hard work
Hi James, your video has come at the perfect timing - for this month I have elected to put as much my money in pension this month. I have opened up a SIPP with interactive investor - where/which fund would you recommend I put this money into,
Excellent advice. Do the same principles apply for those without children?
Hi James, I was struggling to follow the HMRC guide and this has helped. However I’m still a bit confused on the taxable work benefits if you can clarify please? My taxable income is salary less SS pension contribution less car contribution (it’s an EV lease through salary sacrifice scheme so I pay for it out of gross as with pension, do I take this off or ignore it)? Then I add back medical insurance and P11D valve for the car as taxable work benefits?
James; will you do a video for best options for people on Means Tested Benefits (Universal Credit / Means Tested Employment Support Allowance etc) and for people like me who have worked but had to finish work due to health conditions, so could be on a Private Ill Health Pension and none Means Tested Benefits (Personal Independence Payments / Contributions Based Employment Support Allowance)
The two will be very different, with the first probably not being able to save anything
Thanks
fantastic content
Thanks I'm glad you liked it!
Can you do a video for small limited company director
Thank you @James. My understanding is that the govt go by gross income. So if I put more into pension, doesn't change the gross on paper right? Scratching my head. Please clarify.
Thanks James, can Inheritance be added to a SIPP and gain tax relief?
Hi James,
Great and informative video. Thanks for putting this together.
You mention in this video of a calculator you have created to work out pension contributions to keep out of the higher tax bands?
It's a guide; it's in the description of the video.
If I understand this right - someone with income currently under the higher tax rate and and child benefit thresholds should consider making lower pension contributions now and saving/investing the money, in order to make larger pension contributions later on in life if and when they earn more, in order to bring them under the thresholds?
attaboi James. Very clear and nice video!
Thanks I'm glad you liked it!
Hi do you have any videos for pension planning for those who have the lowest tapered allowance each year?
£100k plus has been frustrating as I have been doing exactly this. I now contirbute a silly amount to my pension each year and have pretty much been going backwards in spending power as the bracket doesn’t increase with inflation. My pension has done incredibly well but I’m still 35 years away from retirement…
Great video! Is there a link you can share to help further explain how the 10k tax refund on 125k income is calculated? 14:32
Thank you so much. Im being taxed to the hills. Last year I had to remove child benefit. However this year we can claim again. I will be using the benefits of tax relief.
Great video. Unfortunately, I’m only seeing this at the start of the new tax year. Is there anyway to alter the previous tax year retrospectively by making a late pension contribution?
James I don’t have any money!!!!! lol seriously though perfect advice I am going through this now
Where do you get the 60 % tax that you mention in your video for the middle tax bracket
great video James. To clarify - I am a higher rate taxpayer. If I take money from my ISA and move it to my SIPP, the SIPP provider will add 20% and when I complete my Self Assesment I will get a refund?
That’s a superb video James.
I’ve tried to follow it as closely as I can…
Couple of questions please:
1. If my pension contributions were to the level that I am now eligible to child benefit, will that automatically be calculated and credited as part of my tax return or do I need to enter any specific figures for this? I am not currently eligible for child benefit but have made large pension contributions this year.
2. The effective tax relief on pension has been a source of confusion. I now use my tax return as a calculator. At the start of the tax year, I will meter my expected salary, estimated expenses and benefits in kind (fairly consistent across years) and then play around with pension contribution amounts to see what relief is available. Is this a sensible approach and does it capitalise on the approach you are describing?
Great video, thanks. The bit I'm confused about is how this works if you have a mix of PAYE taxed income, and some yet-to-be-taxed additional income (e.g. foreign income).
Can the pension contribution reduce my overall taxable income in the same way, if some of that income is yet to be declared/taxed? Or does it only work for income that's already been taxed through PAYE?
I'm trying to work out how much I can afford to contribute to my pension (today!), based on what I will owe in tax on the foreign income, but am unsure what calculation to use given the mix of incomes and their tax status.
Hi you cannot count dividends in net relevant earnings when calculating your maximum pension contribution.
I was screwed over by BIK company car costs which effectively meant my wages were inflated but I didn’t have the physical cash and problem is paying into a pension even costing 1.8k I didn’t have the spare cash so ended losing child benefit. My company didn’t renew the cars for 5 years so the Bik increased costs
What happens if your pension scheme doesnt claim the basic rate tax relief and you need to claim this yourself via a self assessment tax return does this still reduce your adjusted net income? Or will you be 20% short?
Can you carry forward unused higher income tax relief from 2022-23 when making a lump sum pension payment into this tax year? Or is this hopeful thinking?
Hi James, where do you find your "taxable income" amount? I think I've always used my P60 amount to calculate for self-assessment and worried I've been missing deducting pension contributions as I didn't know that was possible to do.
If I set up a SIPP to make additional payment to bring under tax threshold to keep tax free childcare 30 hours, do I have to do a self assessment to make sure hmrc see this at the time of declaration that i am still eligible? I'm worried they might only look at PAYE and decide I no longer qualify for the 30 hours
Hi James i'm currently paying CMS every month obviously a chunk of salary, is there any videos on how to invest better for the future with this payment each month.
Outstanding video, James! Nobody on UA-cam talks about this stuff.
Could you go into more detail into why Salary Sacrifice is better than Voluntary Contributions please? You mentioned it's due to National Insurance being paid vs not, but I would love to know more please.
Thank you again!
It’s because via salary sacrifice the pension contribution is made out of pre tax salary, lowering your total salary overall and therefore lowering the amount of NICs both you and your employer pay (as well as lowering the amount of your salary is subject to income tax, and potentially preventing your personal allowance being reduced if your salary is over £100k).
Another trick is to lease an EV on salary sacrifice. The Taxable benefit is deemed to be worth about £30. It explains why there are so many nearly new EVs in the car park at work.
@@MrDuncl This is very popular at the moment.
Lygiabird has nailed it, albeit in a slightly complicated explanation. In essence, if you salary sacrifice there's no NI paid on the salary in the first place. If you pay into your pension after receiving the income, you can get relief on the income tax but not on the national insurance contributions.
I understood it now, thank you all!
OMG, this video is the best ever!
How does this work with Civil Service Pensions?
Probably not related to this video but, I have more than one work place pension from different employers. How can I tell if I'm better off leaving them untouched or if I should consolidate or do something else?
Bit late for me to mitigate the 40% bracket as bonuses pushed me into it. Hopefully pension contributions will reduce the amount owed
If I am on paye do I still have to do self assessment to claim higher rate pension relief?
Great content and very helpful guide. I was working it out for myself, having income from my work, property etc - and its not easy to get it right. Even an accountant could explain / calculate this in digestive way.
Is there any way this guide could be transformed into an Excel file including amount needs to be sacrificed to pension to get you down to lower tax tier?
That’s was my original plan but compliance said no… for obvious reasons (liability).
At work we have Google sheet that we plug the numbers into and it gives us the output.
Although the calculation is not the hard part it’s working out what to add into each box.
Well explained. One thing you missed, which I think should be briefly mentioned in this sort of thing (you may have mentioned it elsewhere): if you are an employee but also a DIRECTOR of the company you work for, your max pension contribution is NOT limited by your salary, but is £60k come what may. I have a micro-company of which I'm the director and this year have "persuaded it to pay me" £12570 in income. But so far I've "got the company" to allocate a SIPP payment of nearly £40k. In fact I'm thinking of making it higher before end of March. Of course the tax efficiency then comes from reduced corporation tax rather than personal tax relief. And I'm not entirely clear how this sort of thing carries through from year to year. But lots of people have micro-companies these days and pay themselves the LEL for salary.
I think you may be wrong on part of the 100 to 125k example. Everyone is entitled to at least 15 hours of free childcare for over 3's until they go to school. Its the additional 15 hour's that take it up to 30 that you lose when earning over 100k. This does change the cost benefit calculation slightly.
You are correct it’s just the 30 hours you’d lose.
Love the videos by the way.
@JamesShack. Thank you for this!
Re. your "Adjusted Net Income Guide" and step 1 of that, when you say "Remember, we’re only talking about contributions you have made, not your employer" I'm reading this as I don't include the pension contributions that my employer has paid. is that correct?
Your taxable income is your income less your contributions. Your employers contributions don't reduce your taxable income. However they do count towards the £60k annual allowance for pension contributions.
This.
James, I've thought of a crazy idea whilst watching your video, would love to hear your thoughts.
If you withdraw from your SIPP before age 55, you are charged a punitive tax fee of 55%.
However, if you earn £125k and sacrifice £25k into your SIPP, then you get a tax saving of 62.5%.
Can you see where this is going?
Scenario 1 (Just take income)
You earn £125k and do not contribute any to your pension. That £25k is charged at 62.5% so your takehome over £100k is £9,375
Scenario 2 (Pension switch-a-roo)
You earn £125k, you sacrifice £25k to your SIPP and then immediately withdraw it at a 55% charge. That 25k then is charged at 55% so your takehome over £100k is £11,250.
So if you really need the money and cannot afford to put it in your pension for savings, you can profit by doing a switch a roo by up to £1,875.
I guess when they made the 55% punitive rate, they didn't realise they would ever have a 62.5% tax bracket!
One other tip, is if you make a private contribution to a pension as a higher or additional rate tax payer, while the actual contribution + 20% basic tax relief goes into a pension, the higher and additional rate (whichever applies to you) tax does not. Meaning you effectively get back 20-25% tax which you can then spend how you want. Its actually a good way of being able to get access to some of the tax money in the short term.
I did wonder that. Great tip 👍
This is a misunderstanding, ignoring the NI benefit of salary sacrifice you're left in exactly the same position regardless of salary sacrifice vs private contribution. Let's take an example where your goal is to reduce your taxable income by £1,000 by putting that £1,000 into your pension. If you salary sacrifice the £1,000 into your pension as a higher rate tax payer, it'll cost you £600 out of your pocket (40% tax relief, ignoring the NI benefit of salary sacrifice for simplicity). To achieve the same £1,000 into your pension via a SIPP contribution, you would need to pay £800 (government contributes the £200 balance to give you the same £1,000 in your pension). You'd then get £200 (20%) cash back via tax return. Giving you a net position of £1,000 in the pension, £600 out of pocket (the £800 contribution less the £200 refund). Exactly the same end position either way.
@MPD90 It is the same in terms of benefit. But it isnt the same in terms of where the tax relief goes. With salary sacrifice ALL the tax relief goes into your pension which you cant access until you retire. With private contributions the higher or additional rate tax relief goes back into your pocket via your return as opposed to going into your pension. There is no difference in overall benefit but there is a big difference as to where the tax relief goes.
@@glostergloster6945 No sorry that's a misunderstanding. Stay with me here, I promise I know what I'm talking about!
Your baseline number is how much you want to contribute to your pension. You have to compare apples with apples. That number is entirely up to you, you pick the number you want to end up in your pension, and regardless of if you pick salary sacrifice or private contributions as your mechanism the net result is the same (barring the NI benefits of salary sacrifice).
In the example I gave above the person is choosing to contribute £1,000 to their pension, and in either event they end up having £600 gross cost to get that £1,000 into their pension, just one way you have to pay £800 at first and claim £200 of it back.
Otherwise what you're really saying is if you contribute less to pension you'll have more money now. Well yes, of course, but that's got nothing to do with the method you use and everything to do with just contributing less into the pension (which you could equally achieve by just contributing less via salary sacrifice, end result is the same).
Hope that makes sense? If not try adding an example with numbers.
How does this work with a salary sacrifice. My employer pay all my pension contributions in lieu of some salary. In this instance i am assuming my taxable income is my Gross pay as appearing on my P60 and Not my Notional Pay.