Hi everyone, welcome back to the channel. Have
you ever been presented with a bonus or a pay
rise and felt like, although you worked hard
for it, you just had to watch while a chunk of
it disappeared into a black hole with the taxman?
I mean, I've been there. Before I retired, I
was a higher rate taxpayer. And every time a
bonus came around, it felt like ATMRC took their
40 % cut and just gave me the scraps. I mean,
I was frustrated. I put in the hours, done the
work and the government was taking well for almost
half of it really. It got me thinking, there
has to be a better way. And at that moment, I
made myself a promise that I would never pay
more than 20 % tax on my ends again. And from
that point on, I didn't either really. So, now
a lot of you who watch this channel are probably
nodding your heads knowing exactly what I was
doing, but for those who don't, I'm gonna share
a bit of a secret. It's completely legal, ethical,
and encouraged by HMRC as a way for you to keep
more of your hard earned money and put it to
work for you. So, it's the promotion problem.
You might be surprised how many people are in
the same boat. I've spoken to countless people
over the years who refuse a promotion because
they thought that the extra worth load actually
wasn't worth it. They looked at the higher salary
and saw that a huge percent of it would just
vanish in in tacks. So they decided to stay exactly
where they were. But this isn't about avoiding
work or skipping promotions. It's not being smart
with your money. And the key is to unlock in
your pension. So let me talk about a SIP. A SIP
is a self -invested personal pension. Now don't
let the word pension put you off. Think of it
as a bit of a supercharged savings account that
comes with a massive government top up. With
one important proviso, if you're a bit younger,
you won't be able to access the cash until you
are 57. So how'd you go and get this tax back?
Well, I'll walk you through the exact process
that I kind of went with. And that was, say I
received a thousand pound bonus from my employer.
Now, because I was a higher rate taxpayer, they
take off 40 % of the income tax and handed straight
to HMRC. Now, so you're left with just £600 less
NENI and all the deductions they take out. I
know it's painful, but here's where the magic
can happen. You can take that £600 from your
bank accounts and put it into your SIP. Now,
when you do, your pension provider automatically
claims back the basic tax relief from HR HMRC,
which is 20%. And that means HMRC sends 150 pounds
straight back into your pension pot. So that's
600 pounds and that was 750. We're not done there.
As a higher rate tax payer, you're entitled to
get the extra tax relief. And you get this by
filling out a self -assessment tax return. And
don't worry, it's not that scary actually. Once
you've done that, HMRC sends that remaining tax
directly to you. or changes your tax code. So
let's tally it up. We put 600 pounds of your
money in and in a few months HMRC has topped
up your pension with that 250 pound and then
giving you the rest of the tax back on your allowance
or paying it straight back into your bank. So
you've got the full 40 % tax back. Now your money.
has now grown from 600 pound to a thousand pounds
sitting in an investment account where it's growing
completely tax -free. So the payoff, now the
best part, when you retire and start taking money
out of your SIP, you'll likely be a basic tax
rate payer, most of us are, and the rules are
pretty straightforward. You get to take 25 %
of your tax -free amounts and the remaining 75
% is then taxed at your current income tax rate
which for most of us will be 20%. So not only
did you avoid paying 40 % tax in your working
life but you also got to take a quarter of it
completely tax free when you retired and only
paid 20 % on the rest. So it's a simple powerful
strategy that lets you keep more of your money
and build a stronger financial future for yourself.
Now we've covered the power of the sick, let's
talk about a different option. Now it might be
even better for some of you, fact for most of
you, I think. Putting your bonus directly into
your workplace pension instead. So why on a SIP
is great, I've got a SIP, I love it, but your
workplace pension often comes with fantastic
benefits you can't get with a SIP, and that's
employer matching. So what is employer matching?
Now many companies will match a certain percentage
of your contributions. For example, your employer
might contribute an extra 5 % of your salary
if you contribute 5%. Now by putting... your
bonus into your workplace pension, you're not
just getting the tax relief from the government,
you're also getting money from your employer.
So let's go back to our thousand pound bonus
example. If you put that money into SIP, you
get the government's 40 % tax relief. turning
your initial £600 back into £1 ,000. But if you
put it into workplace pension, your employer
then might add an extra say £50 or even £100
on top, depending on what their matching policy
is. Now that's an immediate guaranteed return
on your investment that you simply can't get
elsewhere. So let's talk about the difference
between or compare salary sacrifice versus net
pay. So how Your word place pension is set up
also matters. I mean, there's two main methods.
There's salary sacrifice, and this is the most
common and often the best option. With salary
sacrifice, you apply deduct your pension contributions
before the tax is calculated. This means not
only do you save on income tax, but you also
save on national insurance contributions. So
on a thousand pound bonus, you wouldn't just
save the 40 % income tax you'd also save national
insurance contributions which could be an additional
2%. This is a great advantage over SIP where
you have to claim the tax back yourself and you
still pay nicks on gross amounts in a SIP. Now
in the net pay arrangements your pension contributions
are taken after tax and your pension provider
claims their basic 20 % tax for you just like
a sin. However, highway tax payers still need
to claim back the extra relief through a self
-assessment tax return. So it's definitely worth
asking HR which one you're in, particularly if
you're paying 40%. So the key takeaway here is
to check with HR or whoever your company's pension
provider is to see. how your workplace scheme
operates. And if they offer employer matching,
if so what it is, if you can direct your bonus
into your pension through salary sacrifice, because
that's generally the most efficient way to maximize
your money. Getting both the tax and the NIC
savings along with your employer contributions.
Win, win, win, isn't it? Now, have you ever used
a SIP or other tax saving strategies to boost
your retirement? Then everyone who's watching
this always looks in the comments and we get
some great comments in there. So please do comment
below. Thanks for listening.