My salary is above the net income for high income tapering. Should I reduce my employer contributions in order to reduce my tax bill?
07 July 2021
Question by Rebecca
My salary is above the adjusted net income for high income tapering which means I only get the minimum annual allowance for pension contributions (£10k per annum last year). I have a company pension and my employer contributes twice my contribution (so 14% of gross salary for every 7% I contribute) which is a good top up for my pension. How do I decide whether to reduce my employer contributions in order to reduce the tax bill, or keep paying the tax in order to get this "free" pension top up ?
Answered by Rachel Efetha
Thanks for your question. Have you previously used all your annual allowances? If you haven't, then you will be able to carry forward unused relief from the past three years, which may mean you avoid the annual allowance tax charge for last year and possibly this year. However, sooner or later your unused allowance will come to an end and you will be faced with this decision.
The way I see it, of your total contribution of 21%, your employer is contributing 66%, so this is 'free money'. Your annual allowance tax charge will be 45% of your contribution above £10,000, so that still leaves you with a balance of 'free money'.
You don't give me any figures for your salary, but I'm guessing it is around £300,000. So based on this figure we have the following:
£21,000 - your contribution
£42,000 - your employers contribution
£63,000 - total contribution
(£10,000) - annual allowance
£53,000 - overpayment taxable @ 45% (£23,850)
After the tax of £23,850 is paid, you will still have £39,150 in your pension scheme, which is more than the £21,000 you have personally paid. If you look at it from the point of view that the tax has reduced the employers contribution to £18,150, you are still in 'profit' with your 'free money'.
I hope this helps! If you still have any queries please get in touch with me or one of the other advisers on the site.
Chartered Financial Designer
Rachel has nearly 30 years’ experience in Financial Services, with the last 21 years advising clients. She advises on a holistic basis but particularly enjoys Cashflow Planning to see when her clients can afford to retire, and has reduced grown men to tears twice by telling them they could afford to resign right now. As a divorcee herself, Rachel loves coaching women going through divorce to take financial control, and has successfully argued with solicitors to gain her clients a much bigger slice of the pension pie.