Started my pension

brianrhill

the devil is in the detail Ivader

brianrhill

IN summary then:

1. You are paying tax at 20%

2. You are getting tax relief on pension contributions @ 20%

3. You have increased your pension contributions to the extent that you are a basic rate tax payer which means that:

(a) you pay 20% less income tax on just the top part of your income
(b) you receive 20% less tax relief rebated back to you on ALL your pension contributions.

Unless your pension contributions roughly equal the part of your income that would have been taxed as a HRTP, I think you will lose out, considerably.

lvader

brianrhill wrote: »

Unless your pension contributions roughly equal the part of your income that would have been taxed as a HRTP, I think you will lose out, considerably.

You don't really lose out, but yes the aim is to use the high rate portion of your income and pay it into your pension. The result is that even though you are a high rate tax earner all your income is taxed at the basic rate.

jem16

lvader wrote: »

You don't really lose out, but yes the aim is to use the high rate portion of your income and pay it into your pension. The result is that even though you are a high rate tax earner all your income is taxed at the basic rate.

Exactly what I do.

Last tax year I crossed into the higher rate tax bracket by £2000 - all of it savings income. That would have been taxed at 40% but 20% had already been deducted via the bank so a tax bill of £400 would have been due when I completed my tax return.

Instead I paid £1600 net into a personal pension which was increased to £2000 by the pension company so tax relief at 20%. As a higher rate taxpayer I was entitled to claim the extra 20% tax relief so entered the £2000 into my tax return as a pension payment.

My basic rate band was increased by £2000 so I paid no higher rate tax according to my SA calculation and I ended up with a £14 rebate instead of a bill for £400.

sandsy

brianrhill wrote: »

IN summary then:


Unless your pension contributions roughly equal the part of your income that would have been taxed as a HRTP, I think you will lose out, considerably.

This is the bit that applies for me which is why I effectively get 40% relief.

jem16

brianrhill wrote: »

oops, lets try again!

assuming pension contributions are made from gross pay (top of the wage slip), not net pay (bottom of the wage slip)
gross salary: £50000
pension contribution: 37% = £18,500
includes 40% tax relief of = £7,400
net cost to individual = £11,100

if it's net pay, then:
gross salary: £50,000
37% of gross salary, paid from net salary £18,500 (grossed up)
20% tax relief @ source £3,700
20% highr rate tax relief through self assessment, rebates £3,700
net cost to individual = £11,100

Surely these calculations are wrong?

Based on a gross salary of £50k;
Pension of 37% = £18,500

Only £6125 of that contribution would attract higher rate tax relief of 40% so £2450. The other £12,375 would attract basic rate tax relief of 20% so £2475.

Total tax relief is £4925 and not £7400.

If you're a high rate tax payer, you get high rate relief.

Yes but only on that part of your contribution that matches the part of your income that is in the higher rate tax bracket.

If your income was £43,875.10 (which makes you a higher rate taxpayer by 10p) and you paid £10,000 into a pension you would not get higher rate tax relief on the whole contribution - you would get 40% tax relief on 10p, followed by 20% tax relief on £9,999.90.

Unless your pension contributions roughly equal the part of your income that would have been taxed as a HRTP, I think you will lose out, considerably.

How?

browniej

OK - now I am even more confused after reading this thread!

Brianrhill is an IFA so I would expect him to know about financial matters etc but jem16 seems to be saying those figures are wrong - is he wrong?

I'm basically trying to work out how I can save myself some tax by possibly paying more into my pension.

mitchaa

sandsy wrote: »

The 37% comes out at the top of my payslip and after that, my remaining gross salary (which is subject to tax and NI) is just below the higher rate limit so I have no need to fill in tax returns.

Why would you need to fill in tax returns being an employee?

chucknorris

I don't understand this at all. This tax year my projected gross earnings will be >58K, doesn't that mean I can contribute approx 16k to a pension and receive the 40% relief? If it makes a difference I am self assessment.

Or have I got ths wrong and can only contribute approx 8k and actually pay 40% on 8k of earnings to get the 40% relief? In other words you have to pay some 40% tax then claim it back rather than take yourself right down to the 40% band threshold? making the optinum payment halfway between your actual salary and the 40% threshold.

chucknorris

jem16 wrote: »

Exactly what I do.

Last tax year I crossed into the higher rate tax bracket by £2000 - all of it savings income. That would have been taxed at 40% but 20% had already been deducted via the bank so a tax bill of £400 would have been due when I completed my tax return.

Instead I paid £1600 net into a personal pension which was increased to £2000 by the pension company so tax relief at 20%. As a higher rate taxpayer I was entitled to claim the extra 20% tax relief so entered the £2000 into my tax return as a pension payment.

My basic rate band was increased by £2000 so I paid no higher rate tax according to my SA calculation and I ended up with a £14 rebate instead of a bill for £400.

That's what I though but brainrhill is saying that you only get 20% relief because I would be taking myself down to being a basic rate tax payer. It was a marginal decision anyway to pay into my pension, I don't think I will bother as I do not want to end up only getting 20% relief