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Additional Pension and contributions

Discussion in 'Retirement' started by Prim, Jan 17, 2019.

  1. Prim

    Prim Occasional commenter

    Building on the previous AVC thread. Been giving this a little more thought inlight of 40% tax relief on only the amount you earn above the 40% threshold and I have some ideas/solutions.

    If for arguments sake you have an outside business/consultancy and you make £5k a year profit in this business and there are no other expenses. You are then liable for 40% tax on these profits (if you are a 40% tax payer). Thus leaving you with £3k of your hard earned.

    However, if you put all of this £5k into an additional pension then this will be topped up by the government by 40% and you have no tax liability. The only caveat is that you don't exceed your £40k allowance a year.

  2. lindenlea

    lindenlea Star commenter

    Remember that all pension payments are income and are taxed accordingly. Apart from tax free lump sums that is.
    Last edited: Jan 17, 2019
  3. diddydave

    diddydave Lead commenter

    You have to be careful that you don't count the same money twice.

    If your £5k was to be taxed at 40% then you are correct that you would receive only £3k.

    Where I think you are muddying the waters is with the 'topped up' part. If you put the £5k into your pension it is not taxed at 40% so your pension fund gains just that £5k - you do not pay any tax on it at this point in time. There is no more added to the fund by the government.

    Adding to the confusion is how the taxing (or not) of the £5k happens. If you pay it into your fund before it is taxed (usually directly from your salary - as the Prudential AVCs often are) then it avoids coming into the tax calculation at all so there is no other paperwork that needs to be done. However, if you pay it into the fund after it has been taxed you have to claim the tax back from the taxman by completing a tax return.
  4. diddydave

    diddydave Lead commenter

    So for your scenario you either have £5k to put in before it is taxed or you have the £3k that is left after it is taxed and if you put that into the pension the company claims back 20% from the tax man (~£1k that you paid the tax man from the original £5k) and you claim the remaining 20% from the tax man through your tax return.
    Last edited: Jan 17, 2019
  5. diddydave

    diddydave Lead commenter

    I think that's the principle but in the 2nd scenario you wouldn't end up with £5k in the pension fund which must mean some of the £5k is still being taxed.
  6. Prim

    Prim Occasional commenter

    Okay, but not if my income is paid to me as an individual i.e PAYE 40% tax payer and operating as a sole trader? It's all part of the same income stream. I can invest my profit because this is income and receive the benefit? Just asking the question as I do have the offer of some consultancy work next financial year which I would rather invest in another pension pot and receive benefits if they are available.
  7. Prim

    Prim Occasional commenter

    Although if you were to receive another 40% when invested that I guess would be the equivalent to 80% tax relief. That would be nice :)
  8. diddydave

    diddydave Lead commenter

    I do have some experience of this as both myself and my wife have alternative income streams from an LLP, book sales and examination marking that have, at times, pushed us into the 40% bracket so hopefully I can help. Whenever that has happened we've put it into either a private pension or the AVCs. The teacher's AVCs are only available if you are employed as such but you can get tax relief putting the money into other pension funds - we had a mix of both until shortly before we stopped teaching.

    We've had to fill out tax returns for most of our teaching career.
    With respect to pension tax relief I'll go through what I think is relevant on the tax return/situation.

    When you do the tax return you declare:
    1) what money is coming in from any source.
    2) what tax you have already paid
    3) how much you have put into 'other' pension funds

    Crucially the figure in (1) does not include money that was paid into your teacher's pension or the teacher's AVCs.

    The tax man adds up all the 3 figures and to work out if the tax you have paid is right works out your taxable income (income minus 'other' pension payments) (1)-(3). This is your taxable income. This is what is meant be 'tax-relief' - the money paid into a pension doesn't get taxed.

    The tax calculation then is worked out as nothing on the first £11,850, 20% on the next £34,500, 40% on the next £103,650 and 45% on any more (I wish!). They then compare this to the tax you have already paid and either you owe them the difference or they pay it to you.

    Some of it, like your teacher's wages, have already been taxed but you still enter the amount paid before tax, the figure is on the P60 - however what makes the AVCs easier to manage is that any money you were paid but put into the AVCs is not included on the P60 as 'taxable income'. It is as though the tax man doesn't even see it. Money paid to you as a sole trader is not taxed until you include it in your tax return, if you were to put it ALL into a pension fund (subject to the limits) then the amount of tax liability for that extra work is nil.

    The tax man is not concerned with whether the money you get comes from teaching or private work they just add it up, deduct any allowances (such as pension contributions) and work out the tax amount. The 'benefit' is that you don't pay tax.

    A couple more points:
    The tax man will sometimes charge tax for next year estimated on what you earned privately the previous year, my wife's book sales caused this so we have had many a return end up paying us back overpaid tax because I made sure that any amount that took us into the 40% bracket went into a pension.

    There is one situation where the government DOES pay extra into a pension and that is for people who are not earning any money. They are allowed to put in £2880 and the government will top this up to £3600. This is part of the rule that you cannot get tax relief on more than 100% of your earnings but it was decided that this was unfair to people who were out of work.
    Prim likes this.
  9. diddydave

    diddydave Lead commenter

    Got this bit a little wrong too :(
    It's if you are not earning enough to be taxed....so under £11,850...
  10. Prim

    Prim Occasional commenter

    Thanks diddydave, putting any profit in a pension fund seems to be the way to go.
  11. diddydave

    diddydave Lead commenter

    Until they change the rules...there are no guarantees in the future. One other thing is to be aware of what can be taken away from you. As a 'sole trader' you have unlimited liability - if something, heaven forbid, goes badly wrong and you are sued you could lose everything including pension savings.

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