Tax relief on pensions when personal allowance is eroded

bye_bye_band_G

I have a question about how much personal pension payment my husband needs to make to reduce his income back under £100K, the amount at which he starts to lose the personal allowance.

For simplicity, let's say his gross taxable income for this tax year is £110,000.
We've found out recently that if he takes out a personal pension and makes a lump sum into it, he will receive tax relief effectively at 60% (although it's done by giving tax relief at 40% and not losing the personal allowance over £100,000).

So, what's the minimum he needs to pay in to achieve this, we don't want to put any more in than is necessary. Is it -

a) £10,000

b) £8,000 (which he writes on the tax return as £10,000, grossed up by basic rate tax of 20%)

c) £6000 (which he writes on the tax return as £7500, grossed up by basic rate tax of 20% and then the taxman gives him the other £2500 of relief)

d) something else?

I know this is IFA territory. Could anyone dispense some advice, we'd be very grateful. Thankyou.

hugheskevi

It is

b) £8,000 (which he writes on the tax return as £10,000, grossed up by basic rate tax of 20%)

xylophone

http://www.hmrc.gov.uk/incometax/relief-pension.htm - for reference.

bye_bye_band_G

So how does the rest of the tax relief get paid into the personal pension? Does he give provider's name and account details on the tax return and then HMRC actually top up his pension directly?
If he has paid in £8000 (and written this on the tax return as £10,000), is the final additional amount that gets paid into his pension £3333?

So for paying £8000 he gets a pension pot of £13333. (£8000 / 0.6 = 13333). And his taxable income reduces to £100,000, which was what this is all about achieving.

hugheskevi

So how does the rest of the tax relief get paid into the personal pension?

He pays £8,000.

The pension provider claims relief at 20% direct from HMRC, that is worth £2,000, so the amount that goes into the personal pension is £10,000 (£8,000 contribution plus £2,000 the pension provider claims automatically). You don't need to worry about this as it is all automatic - you give the personal pension provider the National Insurance number and they work with HMRC.

Your husband then fills in his annual tax return stating the £10,000 contribution, and HMRC return the other slice of 20% relief due, also worth £2,000, which will probably be returned via a changed tax coding notice for subsequent tax year.

HMRC also then see taxable income of £100,000 and hence give the full Personal Allowance.

So it is a case of pay £8,000 from post tax income, get £2,000 added and £2,000 returned to you at a later date. So a net cost of £6,000 for £10,000 in the pension.

bye_bye_band_G

hugheskevi wrote: »

So it is a case of pay £8,000 from post tax income, get £2,000 added and £2,000 returned to you at a later date. So a net cost of £6,000 for £10,000 in the pension.

Brilliantly clear, many thanks. Now to choose a pension provider............

jem16

bye_bye_band_G wrote: »

Brilliantly clear, many thanks. Now to choose a pension provider............

Does he have a company pension?

bye_bye_band_G

Assuming you're wondering if the amounts I'm talking about would be sufficient if there's nothing else?
Yes, he has many years built up in a well known large company's pension, and despite niggles such as 'pensionable pay' being capped at I think 2% increase per year, it will still probably provide enough for us to live on. Hence why we don't want to put any more than necessary into a private scheme.
We'd much rather spend it now than save for later!

jem16

bye_bye_band_G wrote: »

Assuming you're wondering if the amounts I'm talking about would be sufficient if there's nothing else?

No I was really wondering why you weren't using the company pension if there is one.

However it might still make sense to use a 2nd pension.

bye_bye_band_G

jem16 wrote: »

No I was really wondering why you weren't using the company pension if there is one.

However it might still make sense to use a 2nd pension.

We didn't know we could use the company pension! I know it seems dim but we've only found out as a result of your post that he can make AVC's to the company pension scheme. I suppose it would have been better to do this as a monthly contribution during the year, but it is not too late to put in a lump sum before 5 April.

That now seems to us the logical way to do it, but why would it make sense then to use a second pension?

jem16

bye_bye_band_G wrote: »

That now seems to us the logical way to do it, but why would it make sense then to use a second pension?

It depends on the company scheme and its regulations on when you can take the AVCs and how.

For example with a final salary company pension where you can take the tax free lump sum from the AVC pot and thus avoid reducing the pension it can be a great advantage.

However with some schemes you are more limited with the AVCs having to be taken at the same time as the main scheme as opposed to when you want it. Some schemes only allow you to take 25% tax free cash from the main scheme and 25% from the AVCs. Some have a dire selection of funds available to to you.

In the above cases it often makes sense to use a 2nd pension where you have more choice.