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  • Pension tax relief, how much to save (First world problem alert)
  • djglover
    Free Member

    Wonder if anyone can help with this calculation

    I contribute to a company pension scheme, 5%, employer 8%

    I recently got a new, better paid job and I want to put all the rest of my earnings above the 40% threshold into a SIPP in order to save for retirement.

    How do I find the sweetspot for the maximum monthly contribution and do I have to include the employers 8% in the calcs?

    Ta

    gonefishin
    Free Member

    The maximum allowable contribution to your pension that you can get tax relief on is £40k and that does include your employers contributions. This number however tapers depending on how much you earn and you’ll need to do a pretty complicated calculation if you are in that earning bracket. (frankly it’s a pain in the arse I’m sure doesn’t’ actually raise much in the way of tax and is little more that an exercise in gaining a good headline but I digress).

    If you are below the taper threshold and not going to hit the 40k limit then you would subtract the 5% from your gross salary then figure out how much of the remaining income is in the 40% tax bracket. Calculate 80% of that and that is how much you will need to invest into your SIPP. At the end of each tax year you will then have to do a tax return to claim the additional tax back from HMRC.

    thegeneralist
    Free Member

    Calculate 80% of that and that is how much you will need

    I’m intrigued. Why do you only do 80% of it?

    I was in agreement up until that point.

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    thegeneralist
    Free Member

    PS

    do I have to include the employers 8% in the calcs?

    No

    thegeneralist
    Free Member

    Oh, and make sure you use the latest threshold figure, as they recently bumped it up by a frankly nauseating amount ( the rich get richer)

    I think it is 50k or something now

    shinton
    Free Member

    ^^^^^^that is not correct. As gonefishin already said, employers contributions count towards the maximum £40k a year pension contributions you can get tax relief on.

    thegeneralist
    Free Member

    Yes, that is correct, but I’d be willing to get that it’s also completely irrelevant to the OP.

    Given the naivety of the original post, I’d be gobsmacked if he was earning £82,000 PA.

    /awaits outcome with interest/

    IHN
    Full Member

    I recently got a new, better paid job and I want to put all the rest of my earnings above the 40% threshold into a SIPP in order to save for retirement.

    Why into a SIPP, rather than upping your contributions into the company scheme? The company scheme may well be cheaper than the SIPP, and the contributions will come straight out of your gross salary, saving you the tax return headache.

    footflaps
    Full Member

    Why into a SIPP, rather than upping your contributions into the company scheme? The company scheme may well be cheaper than the SIPP, and the contributions will come straight out of your gross salary, saving you the tax return headache.

    I pay into work’s Stake Holder thing and a SIPP. I find it’s more flexible as varying the amount into a company pension is a PITA and you can only make 1 change a year or something restrictive like that.

    You don’t need a full tax return, I just write to HMRC every April and tell them how much I put in my SIPP that year and they send me a cheque (some months later) for the tax back…

    djglover
    Free Member

    Given the naivety of the original post, I’d be gobsmacked if he was earning £82,000 PA.

    Yep!

    The 40K thing does not impact me, really its just about the handling of the 8%, thanks for clarifying, I have until this point in my life been either below the earning threshold where this matters, or in a DB pension, hence the naivety of the original post!

    Why into a SIPP, rather than upping your contributions into the company scheme? The company scheme may well be cheaper than the SIPP, and the contributions will come straight out of your gross salary, saving you the tax return headache.

    Several reasons

    1: Flexibility of funds I can invest in
    2: Ability to put a lump sum in now and get benefits from previous years
    3: Flexibility of adjusting payments as other investments mature
    4: Ability to consolidate and manage my previous DC pension, which has high fees

    gonefishin
    Free Member

    For the 80% say you had annually a gross amount of £1000 to invest in you pension you would pay in £800 from your net pay and the pension would claim the basic tax relief only (that’s all they can claim) of £200. You would then claim the additional £200 from HMRC by completing a tax return. Once that is completed you will have £1000 hours n your pension for a net cost of £600.

    TiRed
    Full Member

    I have until this point in my life been either below the earning threshold where this matters, or in a DB pension

    The DB contributions, for those in the schemes, are costed at 20x the pension payout and also count towards the £40K tax-free per year. You also have a lifetime allowance of £1M, after which there will be no further tax relief.

    Personally, I’d put everything into the company scheme and use the 40% tax relief for ease of administration.

    Save half your age as a % of your salary (including employer contribution and before tax) is a good rule of thumb. A hard one to maintain, but a good one.

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