Am I on 40% tax ???

lingwood

At work we have recently had our pensions people in and it has raised a question that many people belive they should have been getting 40% tax relief on pension and not the 20% they think they are!

I am on £41,000 (round figure) and pay 5% into my pension (or is this 4% and then made up with 20% tax?)

I thought I belive I am on 20% tax, i.e £6,475 personal allowance + 40 per cent on earnings above £37,401 = £43,876 so me being on $41 K I am on 20% tax?

But others say that I have been paying 40% tax on the amount above £37,401 = £3,599.00 ???

dzug1

You should be on 20% tax - your 'allowance' before going over is £43876 as you say. Your taxable salary is actually less than £41000 as your pension contributions are deducted from it before calculating tax.

Many people misunderstand the £37401 limit - the number of people who post here thinking they will start paying 40% tax on the whole of their income once they go £1 over it is ... well let's say distressing.

If you were on 40% tax, it would up to you to reclaim the extra 20% from the taxman in relation to your pension - it's nothing to do with the pension company. It would probably be built in to your tax code - again nothing to do with the pension company

lingwood

Thanks Dzug for the fast reply!

I knew I was on 20% TAX i.e on less than £43,876 (£37,401 + £6,475)

So I have just won a bet with the people in the office that think they are owed some money.

They are saying that, yes you have your personal allowance of £6,475, but then £6475 to £37,401 you pay 20% tax, and then you pay 40% tax on anything above the £37,401.

So in my case, they are saying I would be paying 40% tax on £3,599

CLAPTON

the 40% tax band starts at 43,876 as already mentioned.

however if your pension is an occupational pension (rather than a personal pension ) then your pension payments of 5% come off at source. i.e. you are automatically given tax relief at your highest rate.
if however you pay into a personal pension then the pension company reclaims 20% and you need to reclaim the rest... although in your case you aren't in the 40% band anyway.

you should be able to tell from your payslip

if there a gross figure
and a taxable figure and do they differ by 5%? if so then you are in an occupational scheme and will be given tax relief appropriate to your highest tax band.

lingwood

Just to clarify I am in the company pension which they match my 5% with 5% from the compnay.

CLAPTON

is it deducted at source before tax calculation ?

lingwood

Its OK now! I have won the "mars bar bet" in the office!

They have all shut up and accept that they are only paying 20% tax.

I think they need to know about this site and forum, but I do not feel like letting them know for being so big headed.

mitchaa

With a 5% pension, you would need to earn in excess of £46,185 to start paying any additional tax at 40%

(£46185 x 0.95 = £43,876)

lingwood

Thanks mitchaa

That is also what I was trying to get over to them, that by increasing pension payments they can reduce there taxable income, and therefore stay under the 40% bracket.

Simply, you are only taxed on what is left after any deductions i.e pensions and personal allowance. Not TAX'ed and then you deduct alowances.

But it is hard to educate Pork!

mitchaa

lingwood wrote: »

Thanks mitchaa

That is also what I was trying to get over to them, that by increasing pension payments they can reduce there taxable income, and therefore stay under the 40% bracket.

Simply, you are only taxed on what is left after any deductions i.e pensions and personal allowance. Not TAX'ed and then you deduct alowances.

But it is hard to educate Pork!

You would think that if they were earning enough money to be classed as a higher rate taxpayer that they would at least be intelligent enough to understand the basic fundamentals of the tax system.

lingwood

High wage does not always = high IQ