Using pension contributions to move back to lower rate tax

wensleydale

Hello

I'm currently hovering just above the threshold for higher rate tax.

One option I have been looking into over the past couple of weeks is investing in a stakeholder pension to "maximise" my higher rate tax relief and effectively bring myself down into the lower rate tax bracket.

My understanding is that I can claim higher rate tax relief up to the level of tax I have paid at higher rate, but I'm unsure as to whether there is a benefit for my company car tax payments too- am I right in saying that if I can move back to lower rate tax bracket I my company car tax liability would reduce to 20% from 40%?

Thanks in advance,


Rich

redpete

There's not really any such thing as "higher rate tax relief", just "tax relief".

As your salary and benefits increase then the amount you get taxed on increases. As things that contribute to tax relief increase then the amount you get taxed on decreases.

If the amount you get taxed on is above the 40% threshold then any income or benefit above this threshold is taxed at 40%.

So if your pension contributions bring your your total taxable income + benefit below the threshold then none of it will be taxed at 40%.

taxing

Hi

Remember that tax relief on the pension (at source) is 20% and that you will need to contact the tax office to have your tax code amended so you get the additional 20% relief against your pay.

Briefly - and as you mentioned stakeholder, say you choose to pay £3600 per annum into a stakeholder pension. You will actually pay only a net £2880 to the pension company as they 'instantly' and at source give you 20% tax relief. (£3600 x 20% = 720 and 3600 - 720 = 2880).

The gross payment of £3600 qualifies for tax relief at your top rate of tax which you say is about to be 40%. So, in all, you are due 3600 x 40% = 1440.

You get the £720 'instantly' as we discussed above. The other £720 is given by including £1800 as an extra allowance in your code.

Why only £1800 - well you have had half the tax relief already, so half the payment gets you the other half.

(It's actually because, your pay is taking you into 40% and £1800 x 40% = £720 which is the other half of the relief you are due).

2010/11 - you can make a payment before 6 April 2011 to mop up the 40% this year - a good broker should be able to sort the paperwork out quickly enough if you act fast. For tax relief, it's too late to have it sorted in your tax code - you would need to write & make a claim which is fairly easily done, once you have your P60 (and P11D if you get benefits from your emplyer). You can come back here and ask, if you choose that route.

Generally, you can make contributions to the full extent of your taxable earnings and wipe out all the tax on your pay. However, there is a cap now (just introduced) limiting relief to £50000 of contributions each year more than that and the rate of tax relief is basically restricted to 20% on the excess above £50000. (You can have extra relief above the £50000 in some instances but maybe these levels are a bit too 'rich' at the moment).


Regards.

nad1611

taxing wrote: »

Hi

Generally, you can make contributions to the full extent of your taxable earnings and wipe out all the tax on your pay. However, there is a cap now (just introduced) limiting relief to £50000 of contributions each year more than that and the rate of tax relief is basically restricted to 20% on the excess above £50000. (You can have extra relief above the £50000 in some instances but maybe these levels are a bit too 'rich' at the moment).

You say that you can make contributions to the full extent.... etc above, we have been looking into adding to a pension in this way, so I've been trying to find out how much we could contribute. I found this site which seems to suggest that it's actually no more than 15% allowed.
http://www.hmrc.gov.uk/pensionschemes/faqs/contoccs.htm#a

As we have no previous experience in this I wonder if you could clarify if there's a difference here to the amount and if so why, perhaps the type of pension,possibly? Also if the Contributions were taken at source, to add to an already existing occupational pension, would there be any need to inform the Tax Office? Also could the Tax Office determine this as Notional Income when working out Tax Credits for example? Would really appreciate your help.Thanks

John_Pierpoint

I think you will find that link is old and out of date - have a look at the tax year of the example.

Let us hope an expert will be along to advise you as I don't have the 40/50% problem any more

System

I think this hmrc page is up to date : Tax Relief on pension contributions

The relevant paragraph states:

Limits on tax relief

You can save as much as you like into any number and type of registered pension schemes and get tax relief on contributions of up to 100 per cent of your earnings (salary and other earned income) each year, provided you paid the contribution before age 75. But the amount you save each year toward a pension is subject to an 'annual allowance'. For the tax year 2010-11 the annual allowance is £255,000 and for the 2009-10 tax year it was £245,000. You pay tax at 40 per cent on any contributions you make that are above the annual allowance.

nad1611

Thanks for bringing this to my attention.