How is tax relief calculated on a pension ?

Dave2112

Hi

I'm in the lucky position of just falling into the 40% tax bracket this year 06/07 :rotfl: and am now looking at ways of avoiding paying that much tax.

Am I right in thinking that what I pay into a company pension is as below (from Directgov.org). If it is then this will take my taxable income below the 40% mark e.g. £40 salary, £3k pension contribution = £37k taxable which falls into 22% bracket.

Company pension schemes

Your employer takes the pension contributions from your pay before deducting tax and (but not National Insurance contributions). You only pay tax on what’s left. If you're a higher rate taxpayer you get the full relief straightaway.

Petmidget

on the button, personal pension contributions and a few other tax geared investments and contributions to charity under Gift Aid in effect extend your basic rate band to give you additional tax relief.

one of the novelties of tax legislation more tax relief on pension for the relatively well off, those who can afford it most but hey ho.

The contributions dont have to be through your employer but that will keep it simple as relief can be obtained through your PAYE code.

I would say if you havent got one already go get an IFA to advise and what pension etc you should be looking at

ctm_2

If your pension is deducted through your payroll, then you have already had the relief at your highest rate of tax. It effectively reduces your taxable pay. So, for example:

Your salary is £40000. You have £5000 deducted from your pay as pension contributions, so you are only taxed on £35000, and no further relief is due.

If you have a personal pension and you make the payments your self from the money you receive, then basic rate relief is added to that by the pension company at the basic rate, and you have to claim the further amount of higher rate relief yourself from HMRC.

cash99

ctm wrote:

If your pension is deducted through your payroll, then you have already had the relief at your highest rate of tax. It effectively reduces your taxable pay. .

Not strictly true. If your employer runs an occupational scheme then this applies. If it is a group personal scheme then pension contributions will be deducted from post tax salary. Either way it will appear as a deduction on your payslip.

In the latter case the tax position is the same as if you made the contribuion independently. Any higher rate tax relief has to be reclaimed, or included in your tax code.

Debt_Free_Chick

Dave2112 wrote:

Hi

I'm in the lucky position of just falling into the 40% tax bracket this year 06/07 :rotfl: and am now looking at ways of avoiding paying that much tax.

Am I right in thinking that what I pay into a company pension is as below (from Directgov.org). If it is then this will take my taxable income below the 40% mark e.g. £40 salary, £3k pension contribution = £37k taxable which falls into 22% bracket.

Not quite ... you need to deduct your Personal Allowance first. This might take you into the 22% tax band anyway - so any pension contribution will actually attract only a 22% tax saving.

Pension contributions only get tax relief at the rate you actually pay.

bristol_pilot

Welcome to the 40% club.

Pension contributions are a very good way to reduce your higher-rate liability. Also remember to claim every single possible allowance. Professional subscriptions, Gift Aid, whatever. Review your savings and investments - what is best for a basic rate tax payer may not be suitable for a higher rate taxpayer.

Dave2112

Thanks everyone.

Deducting my personal allowance still has me in the 40% bracket but with my pension contributions it drops me into the 22% bracket so less tax to Mr Brown.

dunstonh

but with my pension contributions it drops me into the 22% bracket so less tax to Mr Brown.

Which means you wont get 40% tax relief on all your pension contributions then. Dont forget to deduct the pension from your income when declaring working/tax credits (if applicable). Pension contributions can increase the tax credits too (which in effect can give you upto a maximum 72% tax relief)