Additional pension using salary over 40% tax threshold

stain3565

I currently earn just over £40K gross a year and pay into a company pension. I am considering a second personal pension (I may even consider a SIPP via a share dealing service such as that offered by MotleyFool as I already dabble in share dealing).

Over Christmas, my brother-in-law told me about his plan to pay in the difference between his gross salary and the c£35K tax threshold to gain tax relief on this amount e.g. based on a £40K salary, pay into a new pension 5K directly from his salary and thus, this £5K would not be taxed at 40%.

This is an area I know little about and was wondering if this makes sense, as if it does, it would seem a sensible thing for me to consider for my £6K that I currently pay 40% on.

Any advice is welcome

noh

If your total salary is just over £40k and you have a tax code of 747L then you do not pay tax at 40%

This tax year you would have to pay tax at 40% on earnings exceeding £42475 (35000 + 7475)
http://www.hmrc.gov.uk/rates/it.htm

stain3565

Thanks for that. I am a 747L code so that info was very helpful

thenudeone

Once you've clarified the limits you need to remember that (as long as you are not self-employed) your cheque to the pension scheme is not the same as the amount of your salary that you want to contribute, because the pension administrator will add the equivalent of basic rate on to your contribution.
This is explained here:http://www.hmrc.gov.uk/manuals/remanual/re282.htm

So for a basic rate tax payer, to add £10k to a pension needs a cheque for £8k.
For a higher rate tax payer, to add £10k to a pension still needs a cheque for £8k. Entering the payment on the payer's tax return (or submitting a claim) will create an additional tax rebate so that the net cost is only £6k

atush

In addition to your salary you also need to add in interest from savings if you have any if you are registered fro gross (although you shouldn't be)?

Basically add in any income you get that isn't taxed at source.

kidmugsy

atush wrote: »

In addition to your salary you also need to add in interest from savings if you have any if you are registered fro gross (although you shouldn't be)?

Basically add in any income you get that isn't taxed at source.

Yes, and remember to subtract any pension contributions that you're already paying.