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If a person is paid over £45,000 per year then they are a Higher Rate taxpayer and pay Capital Gains Tax at 20%

If that person pays into their salary sacrifice pension and reduces their taxable salary to below £45,000 are they now a Basic rate taxpayer, liable for Capital Gains Tax at 10%?

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This is explained at https://www.gov.uk/capital-gains-tax/rates

There's no cliff-edge where your entire capital gain suddenly changes tax rate because you changed your income tax band. If on the basis of your income, you're a basic rate taxpayer, then you pay 10% CGT on any capital gains between your income and the top of the basic rate tax band. Then you pay 20% on any amount above that.

So for example if you have income of £50,000 and a capital gain of £10,000, you'd normally pay £2,000 in CGT. If you reduce your taxable income to £40,000 either with a normal pension contribution or salary sacrifice, you'll have £5,000 of the basic rate band left. So you'll pay CGT at 10% of £5,000 + 20% of £5,000, i.e. £1,500.

In general, if you have money to spare for a pension contribution, you'd be better off making it over multiple years and only within the higher-rate band. Continuing my example above, and assuming your income is also £50K next year and tax bands don't change, you could either:

  • Make the £10K contribution this year, saving £3K tax on the pension contribution (£5K @40% and £5K @20%) and paying £1.5K tax on the capital gain.
  • Make a £5K contribution this year and a £5K contribution next year. Total tax saving on the pension contribution is £4K (all @40%) and you pay £2K tax on the capital gain.

The reason for the discrepancy is that income tax goes up by 20% at the threshold, but CGT only goes up by 10%. So if you have to pay the higher rate on something, it's better to do it on the capital gain.

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