Tax relief after 'A' day

Milarky

This may not be the best place to ask this but:

If you can contribute up to 100 per cent of 'income' [defintion: only earned income, I assume?] for a given year into your pension then, necessarily, that involves contributions against personal allowances [and lower tax rates] from that year also. Therefore, to receive tax relief on the entire contributon, this will entail some tax relief being given against 'tax free' income, will it not? IS THIS THE CASE?

Second, higher rate taxpayers: They would receive the 40 percent relief on the top slice of their '100 percent' contribution only - the actual income on which they have apid 40 percent that is. For the contribution attributable to income below the 40 percent tax threshold I assume their contributions will be relieved at 22 percent instead. IS THIS THE CASE TOO?

Finally, what about HR taxpayers that pay 40% on investments and other unearned income? Will their amount of 40% tax relief be limited to earned 40% or unearned 40%?

[Imagine the case of a 40% taxpayer from unearned only - that is, they earn from employment up to the threshold and so are only basic rate on the jobs front. Where will they stand?]

Thanks a bunch..

M

dunstonh

If you can contribute up to 100 per cent of 'income' [defintion: only earned income, I assume?] for a given year into your pension then, necessarily, that involves contributions against personal allowances [and lower tax rates] from that year also. Therefore, to receive tax relief on the entire contributon, this will entail some tax relief being given against 'tax free' income, will it not? IS THIS THE CASE?

Second, higher rate taxpayers: They would receive the 40 percent relief on the top slice of their '100 percent' contribution only - the actual income on which they have apid 40 percent that is. For the contribution attributable to income below the 40 percent tax threshold I assume their contributions will be relieved at 22 percent instead. IS THIS THE CASE TOO?

Although the final rules on this have yet to be published, it is expected that this will be no different to how it is now.

i.e. non tax payers still get 22% tax relief and higher rate only get higher relief pro-rata.

Finally, what about HR taxpayers that pay 40% on investments and other unearned income? Will their amount of 40% tax relief be limited to earned 40% or unearned 40%?

its net relevant earnings that matter. Investment and unearned income shouldnt come into play. Benefits in kind can still be taken into account.

ManAtHome

But presumably you can 'soak up' your tax-free allowances with investment income? For example, if you earn £30k salary and £5k investment income you'd normally be taxed on £35k. If you put all your salary into a pension, wouldn't your £5k investment income then be (roughly) tax-free?

ps I'm assuming that you'd only get tax credit up to the amount of tax you're actually liable for, so in the above case the credit on £30k would be £6360 (first £2k at 10%, rest at 22%).

Milarky

ManAtHome wrote:

But presumably you can 'soak up' your tax-free allowances with investment income? For example, if you earn £30k salary and £5k investment income you'd normally be taxed on £35k. If you put all your salary into a pension, wouldn't your £5k investment income then be (roughly) tax-free?

I think I see where you're coming from, but the way it looks from dunstonh's answer is that: first, you received your 'earned' plus 'unearned' income for the year. Second, your income is assessed for tax purposes as though you made no deductable payments and you pay tax on that. Third, you make a contribution to the tune of 100 percent of the 'earned' part of your annual income and the tax attributable to that portion [with the 40% part, if any, being pro rata] is remitted. That then leaves your unearned income for the year, which is the top-slice and therefore all at 40%. The alternative view would have it that you didn't receive any of the pension contribution as income - which plainly you did - and that therefore it is only the remaining income which you did receive - from investments - and thus you are entitled to all your allowances on that. [Imagine a huge 'salary sacrifice' for a top-exec. He just gets all his salary paid by his employer into his pension. He has investments and he gets the first 5K at nil tax and the next 2K at 10% tax and even the next £30,310 at just 22% [and no NICs] Hmm! I wonder if that's how they'll do it?]

I'm assuming that you'd only get tax credit up to the amount of tax you're actually liable for, so in the above case the credit on £30k would be £6360 (first £2k at 10%, rest at 22%).

No, I think you get all earned income upto the threshold for 40% relieved at 22%. Everyone can contribute £3,600 pa without any earnings at present. AFAIK, going to £3,601 would have to be justified by the set percentage of Net relevent earnings - NRE [which starts at 17.5% of NRE and rises in age bands]. When the '100 percent of income' rule replaces this next year, you'll still be able to contribute £3600 on nil NRE. Thus if you had only £3600 income next year - and paid no tax as a result, you'll still get the 22% relief. By extension, I'd expect you to get the 22% relief on NRE from £3601 upto £5035 - the nil personal allowance, and 22% through the £2090 of the 10% band. [Otherwise, its a bit scrappy for savers to make sense from!]