Author Topic: Maths Help Please - UK Taxable Income Calc  (Read 1040 times)

TinyAcorn

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Maths Help Please - UK Taxable Income Calc
« on: September 13, 2018, 06:59:49 AM »
Good people of the MMM Forum – UK Style!  Please can  someone with mad maths skills help me with a taxable pay calculation with SIPP contributions on top of employee DB pension…

I'm not really familiar with forums and any rules of etiquette - so please let me know if I've inadvertently breached any by not posting a proper intro or somesuch before wading in with a request for help?  Help a newbie out?

Anyway, down to it...

I receive child benefit but my income has risen (yay!) such that I now need to work out whether or not I’m due to pay some or all of it back under the high-income tax charge.  None of the advice online or calculators are helpful in my figuring out what may taxable income is as I make both salary sacrifice contributions to a company DB Pension scheme and make contributions to a SIPP and claim tax relief separately for these.  Please help me work this out:

I’m likely to gross £65k this FY from my primary employment (with bonuses so I won’t know exactly until late in the year) and receive Child Benefit for my 2 kids which won’t count as ‘income’.  I have no other income other a little interest on cash savings which is less than £250 per annum so does not need to be declared.  The rest of my savings are in ISAs and the SIPP so any income is exempt. (Following numbers rounded for ease as once I’ve got my head around the calcs I’ll put it in my spreadsheet for accuracy anyway)

I salary sacrifice £260 per month (£3120 per annum) into the DB scheme at work pre-tax and also salary sacrifice £124 per month (£1488 per annum) to pay for childcare vouchers pre-tax.

If I take these figures from the total that gives me a taxable income of £60,392.  In previous years I’ve contributed between £6k and £14k to my SIPP (varying due to mat leave and changing ability to save).  Looking at the £60,392 it would appear pretty simple to put approx. £10k into my SIPP and avoid the high-income tax charge and the requirement to do a self-assessment for the first time (at least half of my motivation, honestly)…

(Rounding down to £60k again for ease of maths… So £10k into the SIPP reduces my taxable income to below the £50k threshold – or does it?)

If I add £10k to my SIPP, I’ll receive basic tax relief directly into my SIPP of £2500 and get a cheque in the next FY for the £2500 higher rate tax relief.  So what is my taxable income now?

Is it £50k – i.e. £60k minus the £10k contribution to the SIPP
Is it £52500 – i.e. £60k minus the £10k contribution to the SIPP plus £2500 tax refund (higher rate tax relief as this is paid back directly)
Is it another number I can’t think of right now because my brain feels like candy-floss…

Am I overthinking this (eminently possible) and assuming it must be more complicated than it actually is?

Please can someone help me with my maths and help me not end up on the wrong side of Her Majesty’s Government!


frugledoc

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Re: Maths Help Please - UK Taxable Income Calc
« Reply #1 on: September 13, 2018, 10:49:30 AM »
2 quick points:

You will need to do a self assessment to claim back the higher rate tax relief on your SIPP contribution.  Only basic relief is added back automatically into your SIPP and you claim for the rest paid as cash.

You will not be eligible for child benefit unless you make the SIPP contribution as the benefit is tapered to zero for taxable income 60k +.  This makes your SIPP contribution even more valuable. If you pay in enough to get your taxable income down to 50k it’s a mega win.  It’s 10k plus the tax refund.

Hargreaves Lansdown has lots of calculators .

Sorry if reply is non sensical.  On train using small iPhone
« Last Edit: September 13, 2018, 10:54:28 AM by frugledoc »

TinyAcorn

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Re: Maths Help Please - UK Taxable Income Calc
« Reply #2 on: September 14, 2018, 01:31:59 AM »
Thanks for the assistance @frugledoc

A colleague of mine requests her higher rate tax refund (from SIPP contributions) by sending HMRC a letter rather than filling out a self assessment but I haven't tried this myself yet.

If I understood you correctly - to work out the taxable income I subtract the total contribution then add back the higher rate tax refund but not the basic refund directly added to the SIPP?

Then if I contribute an amount equal to or greater than:

[ Gross pay - (DB pension contributions plus childcare vouchers) - 50k ] * 1.33r

...then I avoid the need to pay higher rate income charge altogether and possibly avoid the need to do self-assessment if the letter method works for claiming the tax refund...  (I wanted to lay it all out here as it may help someone else here... and laying it out helps me understand it too)

I've contributed amounts in this region previously but this has been an expensive year as we have moved down the country (UK) to be closer to family and while we've reduced both commutes massively, gained more time back with kids, reduced childcare time and cost etc. - which is totally worth it - we've used up some emergency fund and had a brief break in income between Mr Acorn's jobs.

It'll be tight but with the advantages I'm going to add this figure to the 'goals' list for this year - although I won't know what the final figure is til near the end of the tax year...

PhilB

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Re: Maths Help Please - UK Taxable Income Calc
« Reply #3 on: September 14, 2018, 03:39:38 AM »
Hi TinyAcorn,
This one is simpler than you think.
Your gross would be £65k, but your sal sac gets it down to £60k.  To keep all your CB you need to get it down by another £10k and you do this by contributing £10k GROSS into your SIPP.  All you have to do is send a cheque for £8k to the SIPP provider and they will reclaim £2k from HMRC.  You also phone up HMRC to tell them that you've made the pension contribution and they send you a check for a further £2k of tax relief so the net cash cost to you is £6k to put £10k of your income into the SIPP.

Out of interest, does your employer offer AVC's via sal sac?  If so then this might be a better route as it saves NI - even better if the employer shares their NI savings.

frugledoc

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Re: Maths Help Please - UK Taxable Income Calc
« Reply #4 on: September 14, 2018, 04:13:07 AM »
Honestly, filling out a self assessment is easier than faffing on the phone

PhilB

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Re: Maths Help Please - UK Taxable Income Calc
« Reply #5 on: September 14, 2018, 06:09:57 AM »
Honestly, filling out a self assessment is easier than faffing on the phone
That depends on whether you already need to do a SA and what time of year you make your SIPP payment.  The one time I had to do this it took one two minute phone call and I had the cash within a week or two.  Easier than filling in and filing the form and much better than having to wait until the end of the tax year to get my money.

TinyAcorn

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Re: Maths Help Please - UK Taxable Income Calc
« Reply #6 on: September 14, 2018, 08:22:02 AM »
Oops, now I'm confused...

To get my taxable income down to £50k (from £60k)by my first calc, from what I thought @frugledoc was saying (apologies if I've misunderstood your reply), I'd need to contribute £13333 to account for the 'cash back' refund of higher rate tax from HMRC

To get my taxable income down to £50k (from £60k) by the advice of @PhilB I'd need to contribute £8k.

Does it make any difference that if I take the cheque (tax refund) and deposit this in the SIPP then I get to claim the tax relief all over again on this amount???  That doesn't seem right?

@PhilB - I can get AVCs through my employer but their choice of funds + management fees make this not my first choice.  Plus dealing with our pension administrators is painfully slow and frustrating so I may be losing out (by not really figuring out whether the offset NI savings are worth it) by managing my SIPP myself. One example is that they took 6 weeks to give an answer to a colleague about the DB pension, an answer I could give him after 5 mins with a calculator because the scheme is very simply laid out in our T&Cs booklet (the answers matched so it wasn't any more complex for them) so long in fact that he missed his window to change his contributions in that tax year making the answer obsolete...

PhilB

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Re: Maths Help Please - UK Taxable Income Calc
« Reply #7 on: September 14, 2018, 08:52:53 AM »
The number to deduct from your gross income is your gross pension contribution.  Think about it this way, if you had contributed it direct to a company pension from pre tax pay, your employer would have put an extra £10k into the pension, your pay would have been £10k lower and there would be no tax involved anywhere.  Done that way it's obvious that your taxable pay has dropped from £60k to £50k by swapping £10k of it for a pension contribution.  As you are using a personal pension instead we need to go by a round about route, but we need to end up at the same destination - you with nothing, HMRC with nothing, £10k in the pension.
Step 1 is that your employer pays £6k to you and £4k to the taxman (because the £10k is part of your normal wages)
Step 2 you pay £8k to the SIPP
Step 3 HMRC pays £2k to the SIPP
Step 4 HMRC pays £2k to you
Net result after all that you get nowt, taxman gets nowt, pension has £10k

TinyAcorn

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Re: Maths Help Please - UK Taxable Income Calc
« Reply #8 on: September 14, 2018, 11:02:02 AM »
@PhilB Thanks so much for taking the time to describe it another way... maybe it's just how my brain works but it just makes sense now!

Makes me feel slightly more silly for having to ask twice but I'll get over it 😀

Thanks again! (Skips merrily off to update speadsheet...)

PhilB

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Re: Maths Help Please - UK Taxable Income Calc
« Reply #9 on: September 15, 2018, 06:45:24 AM »
I've known people take a lot longer than that to get their head round it!  There was someone on the MSE forums a few years ago trapped in a spiral as they thought they had to pay the tax rebate into the pension scheme.  They'd gone several times round the loop getting a new but smaller rebate each time and were afraid it was never going to end :o)