Pension contributions - higher rate taxpayer - how does this work?

Pal

Getting picky to the point that my nose is starting to bleed....

You do not get tax "relief" of pension contributions. Pension contributions are exempt from tax and so are deducted from income before income tax is calculated. The logic being that you are deferring your income until later in life so do not need to pay the tax now, but will instead pay it when you draw your pension.

As a result it is closer to tax "deferral" than tax "relief" except, as you correctly point out, the tax bill on the deferred income is likely to be lower after retirement. Combined with the tax free cash sum element, this should save some tax.

Personally I prefer the term "tax advantaged".

isasmurf

Pal wrote:

Being the picky sort, this should actually have said:...

...Just to clarify the position re the tax relief:

If you an employee and the pension contributions are deducted from your pay packet, then you get immediate tax relief. The pension contributions are deducted from pre-tax earnings before you pay income tax. You do not need to complete a tax return to claim back this tax as you are given it immediately.

If you are paying into a personal pension, stakeholder or free standing AVC plan you are paying from net income, the provider will immediately claim back 22% of the tax you have already paid on your contribution. To get the remaining 18% you need to complete a self assessment tax return.

I'm also the picky sort, and this should have said

If you are an employee and you are in an occupational pension the pension contributions are deducted from your pay packet, then you get immediate tax relief. The pension contributions are deducted from pre-tax earnings before you pay income tax. You do not need to complete a tax return to claim back this tax as you are given it immediately.

If you are an employee and you are contributing to a Group Personal Pension then the contributions are deducted from your pay packet. Unlike Occupational Pensions, contributions are deducted after tax has been deducted and the tax rules re Personal Pensions follow (see what Pal said about PPs, I can't be bother to plagarise any more!)

littleangel

Okay I officially have a headache now!

But thank you for all the detailed advice, it's starting to make some sense. I'm in a normal group pension plan (no final salary scheme for me) so that explains why it's post-tax rather than pre-tax. I'll get a PP120 form or whatever it is from the tax office now, but as the 40% tax bracket thing only happened as of 1 Jan, and I only started making contributions to my pension as of my January paycheck, I don't need to worry about previous years' taxes.

Tel, thanks for the detailed advice, I've done a few calculations and I'm officially going to be flat broke when I retire! Hmmm. Must have a think about that.