MoneySavingExpert Chair, Martin Lewis · Editor, Marcus Herbert

# 77% tax relief on pension contributions

edited 30 November -1 at 1:00AM
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edited 30 November -1 at 1:00AM
It is possible to get 77% tax relief for pension contribution for certain people.

If you are in this position, for every extra £1 of taxable income you earn you could have to pay 40p in tax and lose 37p in tax credits. However, the opposite is also true: for every £1 by which you reduce your taxable income, you could save 40p in tax and receive 37p in tax credits.

If you are not entitled to working tax credit, you may still be entitled to the family element of child tax credit, worth up to £545 a year (£1,090 for a child under age one).  This tax credit is payable in full if your total income is £50,000 or less.  It is generally clawed back at 6.67p for every £1 of income over £50,000 – rather than the general 37p in the £1 reduction for total income over £5,060.

Some family element of child tax credit should therefore be due if your income is less than £58,171 (£66,342 for a child under age one).  Even if your income is over
£50,000, you could still achieve an effective 46.67% rate tax relief for a pension contribution (40% income tax and 6.67% clawed back tax credit).

EXAMPLE OF 77% TAX RELIEF

John earns £38,500 a year, and his wife Claire earns £11,500 a year, bringing their total income to £50,000 a year.  The couple have four children and pay £250 a week for childcare for their twin boys, aged two. John and Claire’s entitlement to working tax credit (WTC) and child tax credit (CTC) is calculated as follows:
Maximum Potential Working Tax Credit:
Basic element =£1,570
Couple element =£1,545
30 hour working element =£640
Childcare element (maximum £140 pw) =£7,280
Maximum Potential Child Tax Credit
Child element (4 x £1,625) =£6,500
Family element =£545
Total Working and Child Tax Credits =£18,080
Reduced by Abatement 37% of income over £5,060= £16,628
Net credits due = £1,452

If John were to make a gross contribution of £1,000 contribution to a personal pension:
As a higher rate taxpayer he would receive 40% tax relief, ie £400:
The couple’s total income for tax credit purposes would also fall by £1,000, because pension contributions are allowable deductions.
The lower total income would mean that the tax credit abatement would fall by 37% of £1,000, ie they would get £370 extra tax credits.
[glow=red,2,300]John’s pension contribution of £1,000 would therefore attract a total of £770 in tax reliefs and tax credits – an effective total relief rate of 77%. The net cost of his £1,000 contribution would be just £230.[/glow]

You dont have to fit the above example directly to benefit from this but it is certainly worth investigating if you are in this particular tax band and have children.
I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
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If you can get your employer to do this on a salary sacrifice basis it is even better, because you will save 1% on NI. This also saves them 12.8% on NI, if you can get them to add this to their contribution as well then you have a pension contribution of £1128 at a cost to you in net income of £220! (and no additional cost to your employer!)
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• Forumite
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DD,

Good to see such a detailed and clear explanation of how Tax Credits can work in conjunction with pension contributions to boost the effective tax relief  :)

I was flabbergastered though by the figures - £18,000 tax credits for 4 children!

Your lucky man, John only benefits however by dint of the childcare. If the children stayed at home with mum, they would lose out on maximum tax credits by £140pw but only recover 37% of mum's surrendered income - £81.82pw. Thus they would see their residual tax credits fall by £3025 - £545 or 2480. John would thus have to contribute about £2750 [i.e. (2480-1462)/37%] before he began to see the benefit of higher tax relief again. Suppose he pays 15% of salary - £5775. Then the 'additional' tax relief would be about 37% x 3025/5775 or 19%. If he was a higher rate taxpayer this would equate to 59% [no NIC?] rather than 77%.

I take advantage of this somewhat differently -  As a single person (25+) on basic rate tax, I officially qualify for 22% + 37% or 'just' 59% - with turns a marginal decision of whether to contribute to a pension into a 'no-brainer', quite frankly. It also means that I can justify a risk averse investment strategy - because the differential growth between 'cash' and 'shares' is effectively delivered 'upfront' in these high rates of relief.

There is another 'expenditure' that you have not mentioned, however - Gift Aid [giving to charities]. Thus registered charities stand to benefit from the 'largesse' of the new Tax Credits, too, and could raise substantial amounts, I suspect, if they could target the recipient groups of Tax Credits.

A great post, though!  ;D

Regards

M

Digging Out,

Yes, 'salary sacrifice' allows you to 'contribute' to a pension indirectly, and thereby recoup tax credits at 37%, by seeing your salary fall in return for an employer contribution of equal amount. It is often overlooked that a basic rate taxpayer generates as much NIC for Gordon Brown as they do tax [11% + 12.8% = 23.8%, tax = 22%] Normal pension contributions only recover 'half' the potential tax take, whilst salary sacfrice could recover the rest. If I could get my employer to 'do' a salary sacrifice for me, I've worked out, that would boost the effective tax relief from 59% upto about 67% [But that would getting 'greedy' 8)]
.....under construction....
• Forumite
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bumped for reference in another post.
I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
• Forumite
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that's interesting. I have only just become aware that contributions to pensions could be deducted.

With all due respect though, isn't the example given just a juggle with figures. How much would Claire earning £11,500 p.a be taking home? When i earned roughly this amount in 1997 i took home less than £800. I realise changes in personal tax allowances will have changed the sums but to me Claire works purely to pay for childcare.

I put in the sums for this family into the entitledto website without Claire working and discovered that they would only get the family element of £547.50 p.a
• Forumite
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Much of what is posted is a copy and paste example showing the maximum. I do not dispute the figures because they have been independently verified prior to publication. I think that both working is the key to getting more and childcare boosts it a lot too.

Whilst these are maximums, it more importantly highlights that you can get more.
I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
• Forumite
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I think that I may hit this bracket??? Is there a spreadsheet available? I am not sure as I also have a company car, have a tax code of about 70, pay into a works pension @ 6%, pay AVC's @ 30 pcm and contribute to a SIP scheme @ 125 pcm. My gross salary is about 38,500 and my wife earns about 9,000 for 30 hours per week. We have 2 children, one of 16 and one of 11, both in full time education. Can somebody please help me with this calculation? p.s. I also have Credit card bills @ 21,500
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• Forumite
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The entitledto site calculator doesn't seem to work. For my circumstances it shows a WTC amount of +£1000 or so and a CTC amount of -£1000 or so = net amount £NIL.

The Inland Revenue's calculator, on the same details, shows that I am entitled. And I believe that one based on the income limit rules - basically anyone under £50k ish gets the full WTC element don't they?
• Forumite
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Hi, Gosh this sounds great is this still current and is there a limit on the pension contributions you can make annually?
Thanks
• Forumite
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Pensions will always have a tax perk to them although the amount varies year to year.

The earlier in life you start saving in a pension scheme the better, it works out much cheaper.

they are altering a lot of pensions conditions in the next year or two, one main change is that all employees will automatically Opt-in to a pension scheme with their employer and will have 1% deducted from their salary, this will rise over the next few years to 3%. And the great news is that all employers will be forced to contribute!
• Forumite
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Thanks,
Do you know if there is a limit you can pay into a pension before they start disregarding contributions before calculating child tax credits?
For example if I have earnings of say £25K can I pay a pension of say £5K to give declared income of £18K for tax credit calculations.
Cheers
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