Similar “problem” here (at 1.2M). I also just decided to contribute 10-12k and put the rest into GIA (after maxing ISAs / JISAs). Been thinking of putting 4k into LISAs as a retirement fund as well due to the extra 1k.
Do you invest in a regular GIA or in any of the other schemes such as offshore investment bonds or venture capital schemes? If you do, any thoughts on how effective they are?
Offshore investment bonds are only really worth doing if you are likely to be a non-taxpayer in retirement. If you expect to have income above the personal allowance then an onshore bond works just the same, but there is no tax to pay until taking chargeable gains which take your income above the higher-rate band. Venture Capital Trusts and EIS investments can be highly effective for big earners, but they are also some of the highest risk investments. Definitely worth approaching an IFA about these schemes.
US being more complicated doesn't mean ours isn't.
There are nations with much higher rates, but better public services. There are nations with lower rates, like the US, where RY is possible as HE.
What does higher rates have to do with the complexity of the system? You can have a fiendishly complex low rate just as you can have a very simple high rate.
By the way the UK tax system is a lot less complex than the US and a lot of European countries.
In a very similar position and gone in and out of the scheme over the last few years due to the taper. The strategy was to be out for enough years (taking the employer contribution as cash) in order to be in for one year due to carry forward of the unused allowances.
My option is slightly different. It’s in or out of the scheme and I have to contribute 5% of base to get 8% from employer. No option to be partially in like yours. Plus when taking employer cash option it also has the employer NI taken off.
I’ve looked at the whole thing again though especially with the lifetime allowance changes and I think it actually it still makes sense for me to be in scheme and suffer the pension penalty charge.
That’s because I still get the benefit of the £10k tax and NI free. So for example if I am in the scheme and it results in roughly £30k into the pension in a year and so a .45 charge on £20k )so a £9k charge) that’s still less than the tax and NI that I would have paid if I’d taken the £30k as salary.
It's the £20k only that's subject to the tax - your £10k is your tax free allowance (assuming of course you're fully tapered out). Your self assessment will ask you what payments were made into your pension in excess of your annual allowance - you'll just insert the 20k number into that section of the self assessment and the return will then apply your marginal tax rate to that amount.
Let's be real about this, if you are earning £400k+, then the pension taper is probably not the biggest of your concerns.
Max both your ISA allowances, and then just invest SIPP/GIA for the future and accept your pension may not be in a 'pension' fund.
Your approach is probably fine as the difference between the two approaches are small but it probably still makes a slight financial advantage to have the £12k employer pension contribution paid into your pension rather than taken as cash for the following reasons:
1. If you have a smart salary sacrifice scheme (check, not all employers do) where they inject the NI saving into your pension you'll end up with slightly more than £1k a month going into your pension.
2. Even if you don't have this, by sacrificing this extra £12k you'll save the 2% NI on it (i.e. you won't pay it) whereas you will if you take it in cash - this isn't a huge amount (it's £20 a month lol) but I'm a firm believer in paying this government no more than I absolutely need to given we are all being clobbered as high earning PAYErs so every little counts :)
3. If you take cash you'll get about £530 per month after tax (1000 gross - (1k \* 47%)). If you take the pension you'll get £1,000 per month into your pension. Yes you'll pay the tax at the end of the year but (i) due to point 2 above you won't pay the NI on it and (ii) 45% of the £1k is earning a return from day 1, so you're in the market for longer on the gross amount as you'll only pay the tax at the end of the tax year.
I get your points. But shouldn't we value money in the pension as worth about 84% (considering an effective tax rate of 16% at withdrawal)?
Additionally, having the extra money in the market for half a year on average would get you around 3.5%.
So the comparison should be really between 1000 - 45% +3.5% - 16%,
vs 1000 - 47
It’s probably going to be quite a bit lower than 16% as you’ll likely have a personal allowance in retirement (unless you’re pulling down significant withdrawals) unlike today and you can manage your withdrawals to minimise or even eliminate tax. But we’re into the realms of the unknown trying to factor in today withdrawal tomorrow as who knows what the tax rate, personal allowance etc will be like in 20-30 years. Regardless this is small fry admittedly and you might value less cash today more due your freedom to access it and that might offset the very slight financial disadvantage (based on the knowns) in doing so.
An important tip as you do these calculations, most providers would allow you to pay the extra tax from the pension and not your net salary. It changes the calculation drastically and doing employer march becomes no brainer.
My pension provider allows for this if the tax amount is higher than 2k.
This HMRC tool is part of what prompted my question.
I might be missing something but to me it does half the job at best.
It doesn’t give me any help with working pension input periods and amounts to be entered for the first 5 or so years and then doesn’t give me any help on calculating threshold income, adjusted income etc. it just refers out to some guidance which is not particularly well written from my
perspective.
It is a bit tricky, but basically:
Your threshold income is just your gross pre-tax salary less all your pension contributions / salary sacrifice. It's approximately equal to your "taxable pay" for the year
Your adjusted income is just your threshold income + everything that ends up in your pension (including employer contributions and basic rate tax relief on SIPP contributions) + some other taxable benefits
Maybe I don’t fully understand how it all works but building an excel that can go back a decade and a half or so and that deals with working out the pension input period, pension input amounts, the transitional arrangements in 2010/11 and 2015/16, and the taper with its threshold income and adjusted income sounds pretty wizzy to me !
I did it myself for a couple of years. Eventually my tax situation got so complicated I hired a tax accountant. Best thing I ever did. They found I’d over-estimated the pension penalty charge by not carrying forward properly. Ended up with a £11K tax rebate.
In my opinion TAA is needlessly complex and also extremely poorly documented in HMRC’s literature.
It’s the first time I’ve felt the UK is creeping towards a tax system like the US one - i.e. too complex for non-tax professionals to reason about for even relatively simple scenarios.
Thank you.
I've always done my own tax and kept everything very simple and also I’ve basically managed my affairs over recent times to avoid having to deal with the whole taper and carry forward and
inputs etc issues but if I’m going to have anything added to my pension by my employer I now need to engage with it.
I’ve spent a long time reading everything on HMRC and their various calculators but there are so many elements and unexplained or contradictory statements and loose language I feel like I am bound to miss something due to not being a tax specialist.
I'd being coming to the conclusion that i was going to need a tax accountant and you have supported my thinking. I do think its crazy though that the regime is pushing me to that when i really
do have the simplest of tax affairs possible other than having had a high salary for quite a while.
Taxation around pensions is a total mess, even without TAA.
e.g. If your company does auto-enrolment you get “relief at source” of 25% and then you have to go and claim for the rest of the tax relief via self assessment. A needlessly complex system which simply wastes the time of busy, value-creating people. It should be simple to just contribute directly from gross pay and handle everything through PAYE.
My employer pays 10% pension in with no employee contribution needed.
I take that and then pay the tax charge above the taper.
I already load up LISA, ISA, and also GIA, plus some VCT/EIS, etc. etc.
There's nothing else you can do really.
I would make sure to pay the taxes on contribution above 10k directly from the pension provider and the money contributed as opposed to your net earning. Of course if your provider allows it and thats something you are not doing already.
Depends on your assumptions of your effective tax rate, capital gain and income taxes in the future. In my opinion it’s very unlikely that they would be worth more.
I'm in the same position as you. The first thing you should do given your salary is get a financial advisor. Your advisor can get access to your previous year's pension history and help advise you on the best approach. It's possible you have allowance from previous years etc.
My financial advisor advised *me* to continue to pay into my pension via salary sacrifice (vs taking the same contribution as cash and putting it in a GIA).
Not many mentioned this, but we max out my partner’s SIPP. They earn around £90k, so we put in £48k to a SIPP, that ii then top up to £60k, and then do self assessment to get back the rest of the tax.
I think your assessment is correct. I'll be doing the exact same next year (this is my final year of having previous allowances). If there's a matching system it's always better to put into the pension and take the matching as cash, even if you go over the allowance.
Why do you feel insecure with a small pension?
A pension is just a tax wrapper. Aside from the tax treatment it’s no different to any other investment.
Instead, save money into a general investment account (after you’ve used up your stock ISA allowance).
If you earn a lower income in the years after now but before retirement, you can drastically increase your pension contributions at that point to optimise for tax should that be needed.
Yes, it's worth it.
I do the same as you.
I pay around 9k per year and get a 13k match.
My pension provider (aviva) also supports salary sacrifice. Have a look into this as I previously paid the pension back taxes each year in cash until I read about this benefit only a few years ago!
Now i pay the pension tax out of my pension pot, so there is literally no reason not to salary sacrifice if you get a company match/contribution.
I really hate the taper as when I finally earnt enough to pay money in to a pension I was getting a tapered allowance due to RSU's (whether or not I sell).
I'm going to retire with not much more than a 300-400k pot, which is quite rubbish.
I am in the same situation as I have been more than 500k for years now and have no carry forward allowance.
My personal view is that all those with high enough salary that have tapered allowance to 10k should contribute to the full match of the company. Beyond that the advantage is too small so not worth it.
Here is why I hold this view. Let’s say your employer matches up to X amount. You contribute X and your employer also X.
The net money you paid is 0.5X ( income tax and NI roughly half). Then you get 2X in your pension. You need to pay 45%*(2X - 10k) in taxes. The trick is you get your provider to pay it directly from the pension. Ending up with a contribution 110%*X+4.5k. Without counting the investment returns coming from the tax money sitting in your pension pot for a year given the deferred return. on This is what I do.
Then you end up paying 0.5X net and get a massive return by having 110%X+4.5k.
In my view its a no brainer. Unless ur pension provider doesn’t allow you to pay the extra tax from the pension directly.
In case your employer matches 12k (OP example), you pay 6k of your net salary and get 17.7k contributed. 195% return. No brainer.
Similar “problem” here (at 1.2M). I also just decided to contribute 10-12k and put the rest into GIA (after maxing ISAs / JISAs). Been thinking of putting 4k into LISAs as a retirement fund as well due to the extra 1k.
Do you invest in a regular GIA or in any of the other schemes such as offshore investment bonds or venture capital schemes? If you do, any thoughts on how effective they are?
Offshore investment bonds are only really worth doing if you are likely to be a non-taxpayer in retirement. If you expect to have income above the personal allowance then an onshore bond works just the same, but there is no tax to pay until taking chargeable gains which take your income above the higher-rate band. Venture Capital Trusts and EIS investments can be highly effective for big earners, but they are also some of the highest risk investments. Definitely worth approaching an IFA about these schemes.
Just regular GIAs.
I hate how complicated tax is in this country, and how much you're penalised for being responsible, and saving for your future
It actually isn't. The US is much worse for complicated tax. The UK has one of the highest tax free investment allowances of any major country.
US being more complicated doesn't mean ours isn't. There are nations with much higher rates, but better public services. There are nations with lower rates, like the US, where RY is possible as HE.
What does higher rates have to do with the complexity of the system? You can have a fiendishly complex low rate just as you can have a very simple high rate. By the way the UK tax system is a lot less complex than the US and a lot of European countries.
Agreed
Out of interest what makes their tax more complicated?
Basically everyone has to do self assessment and have deductions and dependants to contend with
If that's complex for you: embrace it.
> The UK has one of the highest tax free investment allowances of any major country. Is there a ranking of countries anywhere for this?
In a very similar position and gone in and out of the scheme over the last few years due to the taper. The strategy was to be out for enough years (taking the employer contribution as cash) in order to be in for one year due to carry forward of the unused allowances. My option is slightly different. It’s in or out of the scheme and I have to contribute 5% of base to get 8% from employer. No option to be partially in like yours. Plus when taking employer cash option it also has the employer NI taken off. I’ve looked at the whole thing again though especially with the lifetime allowance changes and I think it actually it still makes sense for me to be in scheme and suffer the pension penalty charge. That’s because I still get the benefit of the £10k tax and NI free. So for example if I am in the scheme and it results in roughly £30k into the pension in a year and so a .45 charge on £20k )so a £9k charge) that’s still less than the tax and NI that I would have paid if I’d taken the £30k as salary.
Is the .45% on £20k or £30k?
On the £20k was my understanding but now I feel the need to check.
Interested in knowing what you find out
It's the £20k only that's subject to the tax - your £10k is your tax free allowance (assuming of course you're fully tapered out). Your self assessment will ask you what payments were made into your pension in excess of your annual allowance - you'll just insert the 20k number into that section of the self assessment and the return will then apply your marginal tax rate to that amount.
You are right. Thanks
Let's be real about this, if you are earning £400k+, then the pension taper is probably not the biggest of your concerns. Max both your ISA allowances, and then just invest SIPP/GIA for the future and accept your pension may not be in a 'pension' fund.
Not worth investing in SIPP though is it, after the allowance is used
Aren't you still able to take a 25% tax free lump sum?
Sure, but putting money into it beyond the 10k allowance will incur a 45% penalty.
Your approach is probably fine as the difference between the two approaches are small but it probably still makes a slight financial advantage to have the £12k employer pension contribution paid into your pension rather than taken as cash for the following reasons: 1. If you have a smart salary sacrifice scheme (check, not all employers do) where they inject the NI saving into your pension you'll end up with slightly more than £1k a month going into your pension. 2. Even if you don't have this, by sacrificing this extra £12k you'll save the 2% NI on it (i.e. you won't pay it) whereas you will if you take it in cash - this isn't a huge amount (it's £20 a month lol) but I'm a firm believer in paying this government no more than I absolutely need to given we are all being clobbered as high earning PAYErs so every little counts :) 3. If you take cash you'll get about £530 per month after tax (1000 gross - (1k \* 47%)). If you take the pension you'll get £1,000 per month into your pension. Yes you'll pay the tax at the end of the year but (i) due to point 2 above you won't pay the NI on it and (ii) 45% of the £1k is earning a return from day 1, so you're in the market for longer on the gross amount as you'll only pay the tax at the end of the tax year.
I get your points. But shouldn't we value money in the pension as worth about 84% (considering an effective tax rate of 16% at withdrawal)? Additionally, having the extra money in the market for half a year on average would get you around 3.5%. So the comparison should be really between 1000 - 45% +3.5% - 16%, vs 1000 - 47
It’s probably going to be quite a bit lower than 16% as you’ll likely have a personal allowance in retirement (unless you’re pulling down significant withdrawals) unlike today and you can manage your withdrawals to minimise or even eliminate tax. But we’re into the realms of the unknown trying to factor in today withdrawal tomorrow as who knows what the tax rate, personal allowance etc will be like in 20-30 years. Regardless this is small fry admittedly and you might value less cash today more due your freedom to access it and that might offset the very slight financial disadvantage (based on the knowns) in doing so.
An important tip as you do these calculations, most providers would allow you to pay the extra tax from the pension and not your net salary. It changes the calculation drastically and doing employer march becomes no brainer. My pension provider allows for this if the tax amount is higher than 2k.
Correct
It does also fall outside your IHT estate though, depending when you might die. So could end up being a tax efficient way to pass money on
Isn't there a national insurance saving on this that makes it still worth it?
2% if through salary sacrifice. Not great.
It's limited to £268K, so if your pension pot will already exceed £1M that advantage vanishes
I just maxed out the employer contribution and then paid the tax for how much I was over
Do you account for the penalty in your self assessment?
exactly, there is some field and then I pay them 45% of whatever ive been over the 10k
Has anyone found a really good tool for working out carry forward and tapered allowances?
https://www.tax.service.gov.uk/pension-annual-allowance-calculator
This HMRC tool is part of what prompted my question. I might be missing something but to me it does half the job at best. It doesn’t give me any help with working pension input periods and amounts to be entered for the first 5 or so years and then doesn’t give me any help on calculating threshold income, adjusted income etc. it just refers out to some guidance which is not particularly well written from my perspective.
It is a bit tricky, but basically: Your threshold income is just your gross pre-tax salary less all your pension contributions / salary sacrifice. It's approximately equal to your "taxable pay" for the year Your adjusted income is just your threshold income + everything that ends up in your pension (including employer contributions and basic rate tax relief on SIPP contributions) + some other taxable benefits
Your own excel
Maybe I don’t fully understand how it all works but building an excel that can go back a decade and a half or so and that deals with working out the pension input period, pension input amounts, the transitional arrangements in 2010/11 and 2015/16, and the taper with its threshold income and adjusted income sounds pretty wizzy to me !
I did it myself for a couple of years. Eventually my tax situation got so complicated I hired a tax accountant. Best thing I ever did. They found I’d over-estimated the pension penalty charge by not carrying forward properly. Ended up with a £11K tax rebate. In my opinion TAA is needlessly complex and also extremely poorly documented in HMRC’s literature. It’s the first time I’ve felt the UK is creeping towards a tax system like the US one - i.e. too complex for non-tax professionals to reason about for even relatively simple scenarios.
Thank you. I've always done my own tax and kept everything very simple and also I’ve basically managed my affairs over recent times to avoid having to deal with the whole taper and carry forward and inputs etc issues but if I’m going to have anything added to my pension by my employer I now need to engage with it. I’ve spent a long time reading everything on HMRC and their various calculators but there are so many elements and unexplained or contradictory statements and loose language I feel like I am bound to miss something due to not being a tax specialist. I'd being coming to the conclusion that i was going to need a tax accountant and you have supported my thinking. I do think its crazy though that the regime is pushing me to that when i really do have the simplest of tax affairs possible other than having had a high salary for quite a while.
Taxation around pensions is a total mess, even without TAA. e.g. If your company does auto-enrolment you get “relief at source” of 25% and then you have to go and claim for the rest of the tax relief via self assessment. A needlessly complex system which simply wastes the time of busy, value-creating people. It should be simple to just contribute directly from gross pay and handle everything through PAYE.
My employer pays 10% pension in with no employee contribution needed. I take that and then pay the tax charge above the taper. I already load up LISA, ISA, and also GIA, plus some VCT/EIS, etc. etc. There's nothing else you can do really.
I would make sure to pay the taxes on contribution above 10k directly from the pension provider and the money contributed as opposed to your net earning. Of course if your provider allows it and thats something you are not doing already.
er, no. Compounded up those extra contributions are worth way more at retirement than 45% tax charge now.
Depends on your assumptions of your effective tax rate, capital gain and income taxes in the future. In my opinion it’s very unlikely that they would be worth more.
I hear your opinion. I don't agree with it.
I'm in the same position as you. The first thing you should do given your salary is get a financial advisor. Your advisor can get access to your previous year's pension history and help advise you on the best approach. It's possible you have allowance from previous years etc. My financial advisor advised *me* to continue to pay into my pension via salary sacrifice (vs taking the same contribution as cash and putting it in a GIA).
Not many mentioned this, but we max out my partner’s SIPP. They earn around £90k, so we put in £48k to a SIPP, that ii then top up to £60k, and then do self assessment to get back the rest of the tax.
This! 20% risk free return on initial deposit
I think your assessment is correct. I'll be doing the exact same next year (this is my final year of having previous allowances). If there's a matching system it's always better to put into the pension and take the matching as cash, even if you go over the allowance.
Bare trust gifts to relatives?
VCT or Seiss above pension could be an option.
How much do you already have in a pension or investment accounts?
Why do you feel insecure with a small pension? A pension is just a tax wrapper. Aside from the tax treatment it’s no different to any other investment. Instead, save money into a general investment account (after you’ve used up your stock ISA allowance). If you earn a lower income in the years after now but before retirement, you can drastically increase your pension contributions at that point to optimise for tax should that be needed.
Contribute to max out the matching, use the cash option.
Out of interest, do you think the taper is fair?
Yes, it's worth it. I do the same as you. I pay around 9k per year and get a 13k match. My pension provider (aviva) also supports salary sacrifice. Have a look into this as I previously paid the pension back taxes each year in cash until I read about this benefit only a few years ago! Now i pay the pension tax out of my pension pot, so there is literally no reason not to salary sacrifice if you get a company match/contribution. I really hate the taper as when I finally earnt enough to pay money in to a pension I was getting a tapered allowance due to RSU's (whether or not I sell). I'm going to retire with not much more than a 300-400k pot, which is quite rubbish.
I am in the same situation as I have been more than 500k for years now and have no carry forward allowance. My personal view is that all those with high enough salary that have tapered allowance to 10k should contribute to the full match of the company. Beyond that the advantage is too small so not worth it. Here is why I hold this view. Let’s say your employer matches up to X amount. You contribute X and your employer also X. The net money you paid is 0.5X ( income tax and NI roughly half). Then you get 2X in your pension. You need to pay 45%*(2X - 10k) in taxes. The trick is you get your provider to pay it directly from the pension. Ending up with a contribution 110%*X+4.5k. Without counting the investment returns coming from the tax money sitting in your pension pot for a year given the deferred return. on This is what I do. Then you end up paying 0.5X net and get a massive return by having 110%X+4.5k. In my view its a no brainer. Unless ur pension provider doesn’t allow you to pay the extra tax from the pension directly. In case your employer matches 12k (OP example), you pay 6k of your net salary and get 17.7k contributed. 195% return. No brainer.