Higher Rate Tax/Pension Contributions.

triplea35

Probably a stupid question to those in the know but can someone enlighten me:

I have been paid £3000 which falls into the higher tax band after ny personal allowance and £34800. Therefore I have paid £3000 @ 40% = £1200 at the higher rate.

I want to make pension contributions to optimise the benefit of reclaiming the 40%

I understand if I make an annual payment of £4000 the pension provider will claim the 20% basic rate back for me which will be £1000 and add it to my investments.

I can then claim the further tax back through my tax return.

But what is the amount I can claim? Is it a full £1000 out of the £1200 paid or is it just £600 ie the amount that I have paid at a higher rate ie I would have paid 20% (£600) at the basic rate.

Hope that makes sense?

CLAPTON

if you make pension payments of 4,000 out of taxed income (i.e. not to your occupational pension) then it works like this

the HMRC will consider the amount paid gross as 4000/80% = 5000
the pension provider will invest 5000 for you in your pension so they have reclaimed 20% on your behalf

you say you were otherwise 3000 above the 40% tax band
the HMRC will effectively deduct your gross pension payment from your salary i.e. deduct 5000 so they will refund 20% of 3000 i.e.£600


if you only wanted to pay sufficient pension to avoid 40% tax then you would only need to pay 3000 x 80% = 2,400
then your pension provider would invest 3000 on your behalf hence reclaiming 20% of the tax then you can reclaim the remaining 20% of 3000 i.e. £600 direct from the tax man