Donate to Remove ads

Got a credit card? use our Credit Card & Finance Calculators

Thanks to csearle,brightncheerful,Dormouse,Silverstar64,dave559, for Donating to support the site

Employer scheme or my own - for best tax efficiency

BitterLemon
Posts: 20
Joined: March 19th, 2020, 1:33 pm
Has thanked: 3 times
Been thanked: 1 time

Employer scheme or my own - for best tax efficiency

#357466

Postby BitterLemon » November 17th, 2020, 7:41 pm

Hi All

So i recently started working for a new employer who shall remain nameless but suffice to say they don't seem to know their backside from their elbow when it comes to the pension scheme they offer. I know that they SHOULD help / explain what the scheme is and how it works etc but they don't seem capable......

With a lot of digging i've determined that sadly it is not a shared cost/salary sacrifice scheme. It offers me the option to pay AVCs which are then sent to their designated pension provider. It also seems to operate with the relief at source as defined nicely here:

https://www.nowpensions.com/help-centre ... -at-source

So i don't think i save on NICs and I have the hassles of having to claim higher rate relief back from self assessment/hmrc come year end.

Tax and NI savings being equal I'd rather have my pension contributions hitting my existing pension.

My tentative conclusion is that
-I would be best to enroll into the scheme for the auto enrollment benefit of the employers 3% contribution.
-There is no point in making AVCs above the auto enrollment level since I don't believe this would save any tax etc over just taking the pay and paying it into an existing pension scheme that I have. (i'm thinking this will result in the same ultimate tax cost and take home pay)??

Can somebody please advise if this is sound thinking or if i've got this all completely wrong?

Alaric
Lemon Quarter
Posts: 4615
Joined: November 5th, 2016, 9:05 am
Has thanked: 13 times
Been thanked: 949 times

Re: Employer scheme or my own - for best tax efficiency

#357481

Postby Alaric » November 17th, 2020, 8:31 pm

BitterLemon wrote:-There is no point in making AVCs above the auto enrollment level since I don't believe this would save any tax etc over just taking the pay and paying it into an existing pension scheme that I have. (i'm thinking this will result in the same ultimate tax cost and take home pay)??

Can somebody please advise if this is sound thinking or if i've got this all completely wrong?


I believe there is no tax arbitrage in making employee contributions as AVCs via your employer's scheme as against your own existing scheme. Charges and investment availability may be different and thus may favour one route against the other. There would be a timing difference in using your own scheme as the tax relief to make a net payment up to a gross one usually takes a couple of months to arrive.

Some employers use the "net pay" system. This awards the tax relief on employee contributions by adding to the personal allowance. This doesn't award tax relief where the employee's pay is less than the personal allowance, so such employees get the benefit of tax relief only by investing direct.

BitterLemon
Posts: 20
Joined: March 19th, 2020, 1:33 pm
Has thanked: 3 times
Been thanked: 1 time

Re: Employer scheme or my own - for best tax efficiency

#357856

Postby BitterLemon » November 18th, 2020, 5:26 pm

Thanks for confirming Alaric.

Yes timing is a good point. If i've understood matters correctly then if i contribute to my own scheme then I can make a single lump sum payment in March when I have a good idea of my income for the year so as to ensure i get relief of all higher rate earnings.

ie if by the end of march i can see i'm on track to earn £60K for the year I can then make a 14K pension contribution (10K direct payment by me and 4k tax rebate top up) and bring my income to 50K so i dont hit the higher rate band. Does this sound correct?


I have to say I get a little nervous of making this decision when a lot of it seems to be based on inference and assumption about how the employer pension scheme operates. I'm really trying to get a worked example payslip with pension deductions as all they have provided is some examples of the AVC side of things but not demonstrated the impact on the payslip.

Alaric
Lemon Quarter
Posts: 4615
Joined: November 5th, 2016, 9:05 am
Has thanked: 13 times
Been thanked: 949 times

Re: Employer scheme or my own - for best tax efficiency

#357868

Postby Alaric » November 18th, 2020, 5:48 pm

BitterLemon wrote:ie if by the end of march i can see i'm on track to earn £60K for the year I can then make a 14K pension contribution (10K direct payment by me and 4k tax rebate top up) and bring my income to 50K so i dont hit the higher rate band. Does this sound correct?


I believe that to be a common practice. If the amount you would place in a pension scheme has to be variable from one year to the next, running it personally rather than in a Company payroll may well be a preferred option. You would only get 2.5k as direct rebate in your worked example, the balance comes through your tax return either by giving you a direct refund of overpaid tax or reducing the amount of tax otherwise owed.


Return to “Pensions - Practical Problems”

Who is online

Users browsing this forum: No registered users and 4 guests