How much should I be paying into a pension?

ffacoffipawb

Procrastinator333 wrote: »

I think u need to do a bit of research on how tax relief on pension contributions works.

Nothing wrong with my figures above, perhaps you need to get a better calculator.

ffacoffipawb

jem16 wrote: »

£1200 is being deducted but £1500 is actually being paid into the pension which is a rate of 6.25% which after tax relief would be 5%.

To be a true 5% rate, only £960 would be paid into the pension thus giving a take home pay of £17,914.36 which is a reduction of 4.1%.

No, 5% of £24,000 is £1,200. It is deducted from gross salary before income tax is paid and gains no further tax relief as it has already, effectively, received it.

Procrastinator333

ffacoffipawb wrote: »

Nothing wrong with my figures above, perhaps you need to get a better calculator.

You are confusing net and gross contributions.

Try it on this.

http://listentotaxman.com/index.php

If you do it no pension, that gives you £18,682 as you note. If you enter 5% in the pension contribution box, yes you get the £17,722 you quote net. However, click on the little arrow by the pension amount of £1,200 and you will see it states another £300 is added by the government. That is because the 5% has come out of your net wage. The £1,200 is a net contribution.

As has been highlighted, that gives £1,500 in to your pension or 6.25%. So yes net pay drops by 5.2% in your example, but that is in exchange for 6.25% going in to your pension.

jem16

ffacoffipawb wrote: »

No, 5% of £24,000 is £1,200. It is deducted from gross salary before income tax is paid and gains no further tax relief as it has already, effectively, received it.

Exactly. However £1200 is not being paid into the pension- £960 is.

I'll try again as I obviously explained it badly.

From your own figures. With no pension contributions £18,682 net. With a 5% contribution £17,722 net. £18,682 - £17,722 is £960.

£960 is 4% of £24,000 ,therefore your net pay is 4% less through having paid into the pension than if you did not pay into the pension.

jem16

Procrastinator333 wrote: »

You are confusing net and gross contributions.

Try it on this.

http://listentotaxman.com/index.php

If you do it no pension, that gives you £18,682 as you note. If you enter 5% in the pension contribution box, yes you get the £17,722 you quote net. However, click on the little arrow by the pension amount of £1,200 and you will see it states another £300 is added by the government. That is because the 5% has come out of your net wage. The £1,200 is a net contribution.

Unfortunately listentotaxman doesn't handle pension contributions properly as far as quoted figures go.

If a £1500 gross contribution had been paid this would have reduced the taxable income to £24,000 minus £1500 minus £7475 which is £15,025 and not the £15,325 that listentotaxman quotes. The tax due on that would be £3005 and not the £3065 quoted on listentotaxman.

ffacoffipawb's figures are actually correct for a 5% gross pension contribution from a £24k salary but where he/she has gone wrong is comparing the two net salaries with each other as opposed to comparing the two net salaries with the original gross salary.

ffacoffipawb

jem16 wrote: »

Exactly. However £1200 is not being paid into the pension- £960 is.

I'll try again as I obviously explained it badly.

From your own figures. With no pension contributions £18,682 net. With a 5% contribution £17,722 net. £18,682 - £17,722 is £960.

£960 is 4% of £24,000 ,therefore your net pay is 4% less through having paid into the pension than if you did not pay into the pension.

But the net pay is £18,682 which falls by 5.13% (not 4%) to £17,722.

What dunstonh said above was "That is before tax relief. So, remember that you net pay (what you take home) is actually only reduced by 4%. The other 1% is tax relief."

Maybe it is just semantics, but I would read it that dunstonh says that the NET pay of £18,682 falls by 4%, which I have shown is not the case. It falls by 4% of the gross, but that's not how I read dunstonh's comment.

jem16

ffacoffipawb wrote: »

What dunstonh said above was "That is before tax relief. So, remember that you net pay (what you take home) is actually only reduced by 4%. The other 1% is tax relief."

You always compare with the gross figures as that is what pension tax relief is calculated on.

When you compare the two net figures with the original gross figure, one is 4% less than the other. So you are paying in an amount worth 5% of your gross pay but it is only costing you 4% of your gross pay.

Maybe it is just semantics.

Perhaps it is but when providing HMRC with figures to calculate higher rate tax relief ( assuming you don't already receive it at source) it is always the gross figures that are used and not the net. If you were to use the net payments on your tax return you would be doing yourself out of some tax relief. Also when calculating taxable income it is always the gross figures that are used and not net figures.

So from that point of view it is always correct to compare from the gross figures which is what Dunstonh, as an IFA, would have been doing.

ffacoffipawb

jem16 wrote: »

You always compare with the gross figures as that is what pension tax relief is calculated on.

When you compare the two net figures with the original gross figure, one is 4% less than the other. So you are paying in an amount worth 5% of your gross pay but it is only costing you 4% of your gross pay.



Perhaps it is but when providing HMRC with figures to calculate higher rate tax relief ( assuming you don't already receive it at source) it is always the gross figures that are used and not the net. If you were to use the net payments on your tax return you would be doing yourself out of some tax relief. Also when calculating taxable income it is always the gross figures that are used and not net figures.

So from that point of view it is always correct to compare from the gross figures which is what Dunstonh, as an IFA, would have been doing.

As it was an employer scheme I assumed the 5% was gross, before tax, so no tax relief would be needed as it is already allowed for as the contribution was paid gross.

Of course, some schemes may pay NET with the provider reclaiming the tax.

My figures are based on the former situation, as all schemes I have ever been in have operated that way.

jem16

ffacoffipawb wrote: »

As it was an employer scheme I assumed the 5% was gross, before tax, so no tax relief would be needed as it is already allowed for as the contribution was paid gross.

I realise that. However as i said only 4% gross is actually being paid as you would expect with a 5% gross contribution and 1% tax relief, in this case at source ( ie. you pay less tax in the first place) as opposed to the provider claiming it. If you paid from your net salary your contribution would be 4% with the provider claiming the other 1%.

Of course, some schemes may pay NET with the provider reclaiming the tax.

The outcome is exactly the same.

My figures are based on the former situation, as all schemes I have ever been in have operated that way.

I'm not disagreeing with your figures. I am disagreeing with your interpretation of them.

You are taking a net salary before pension and saying how it compares with a net salary after pension and coming up with a figure that bears no relation to actual contributions. You should be comparing how each net salary is reduced from the gross as that is how tax relief is worked out on pension contributions.

ffacoffipawb

jem16 wrote: »

You are taking a net salary before pension and saying how it compares with a net salary after pension and coming up with a figure that bears no relation to actual contributions. You should be comparing how each net salary is reduced from the gross as that is how tax relief is worked out on pension contributions.

No:-

What dunstonh said above was "That is before tax relief. So, remember that you net pay (what you take home) is actually only reduced by 4%. The other 1% is tax relief."

Net pay is not reduced by 4% which is what he states in my red emphasis above, that's all I was saying.

Net pay falls by 5.13%, i.e. what you take home is 5.13% less as a result of making a 5% pension contribution (tax relief at source) - not 4% less.

Whether it is tax relief or not is irrelevant.