Gross or Net

xtra_time

Hi,

Quick question hopefully. Should your personal company pension contribution be taken from your gross or net wage?

Thanks

dipsomaniac

final salary personal pension contributions are taken out of your gross salary

dejongj

Mine is from my gross, considering I am a higher rate tax payer that is a very nice tax efficient way of doing a personal pension....

xtra_time

Thanks for these answers. The reason I asked is that our company was taken over and they seem to be taking the pension contribution after tax which means I end up paying more tax than I used to.

xtra_time

Just investigated a bit more and this seems to suggest that it should be from net so the new company is correct.

Below is taken from : http://www.hmrc.gov.uk/PENSIONSCHEMES/faqs/contoccs.htm#i

Q. As an employer how do I make contributions to my employees' personal pension schemes?

A. As an employer, you would simply make a gross payment to the appropriate provider. You then claim tax relief through your accounts in respect of the payment. Contributions made by an employer to an approved personal pension scheme do not count as taxable pay of the employee concerned. You do not therefore have to deduct tax or N.I. contributions from the payment.

Some employers collect their employees' personal contributions and pass them over to the pension provider on their behalf. The tax position is quite different for these contributions. Employees get tax relief through a special relief at source system (similar to the old MIRAS system for mortgage relief). Tax and NIC is deducted from gross income in the normal way (under PAYE). The employee (or an employer acting as his agent) then pays a net contributions to the pension provider, who claims back basic rate tax from the Inland Revenue and credits it to the personal pension plan.

For example, an employee wishing to pay £100 a month gross will actually pay £78 a month (for the tax year 2002/2003) from his net pay. The provider will credit the plan with a further £22, i.e. an amount equal to the basic rate of tax, to bring the total contribution up to £100.

jem16

xtra_time wrote: »

Thanks for these answers. The reason I asked is that our company was taken over and they seem to be taking the pension contribution after tax which means I end up paying more tax than I used to.

Are you a basic rate of higher rate taxpayer?

If basic rate it should make no difference. If you were paying in £100 from your gross pay, you would only pay £78 from your net pay.

If higher rate you need to apply for the extra 18% relief through a tax return.

Judwin

From a 'tax' point of view it doesn't make much difference.

If your employer makes gross deductions, then you don't pay any 'tax'

If your employer makes net deductions, then you get taxed through PAYE, but you can reclaim the 'tax' (at either 22% or 40%) via your tax return.

By 'tax' I mean income tax. Where there is a BIG difference is the National insurance contributions. You cannot reclaim that.

If your employer makes gross deductions, then you shouldn't be paying NIC on the gross deductions - 10% IIRC. Also, if you can get your company to agree this as salary sacrifice, then the company don't have to pay 13% NI either. Some companies may agree to pay some/all of this 13% into your pension plan. The overall effect can be anything up to 24% extra in your pension plan (your 10% times their 13%).

If your employer makes net deductions, then they have to pay Gordon their 13%, and you have to pay your 10%. You can't get it back.

I suggest you read the sticky on Salary Sacrifice, and then go talk to your payroll dept.

Cheers,
Judwin

TCA

Can anyone confirm the exact nature of the personal pension contribution tax savings for a higher rate tax payer via a lump sum payment. I was under the impression that if I had say, £10k of income subject to 40% tax, then a personal pension contribution of £6k would allow £1800 hr tax (40%-22%) to be reclaimed through the tax return and £2200 (22%) would be paid into my personal pension by HMRC.

On using their online tax return calculator it appears that HMRC only gross up the £6k by the basic rate factor to £7692 and increase you br band by this amount. So hr savings are only £1385 (18% of £7,692) and HMRC would appear to pay £1692 into my pension on this basis.

Can anyone confirm either calculation?

Thanks.

Judwin

TCA wrote: »

Can anyone confirm the exact nature of the personal pension contribution tax savings for a higher rate tax payer via a lump sum payment. I was under the impression that if I had say, £10k of income subject to 40% tax, then a personal pension contribution of £6k would allow £1800 hr tax (40%-22%) to be reclaimed through the tax return and £2200 (22%) would be paid into my personal pension by HMRC.

On using their online tax return calculator it appears that HMRC only gross up the £6k by the basic rate factor to £7692 and increase you br band by this amount. So hr savings are only £1385 (18% of £7,692) and HMRC would appear to pay £1692 into my pension on this basis.

Can anyone confirm either calculation?

Thanks.

You always need to make pension contribution net of 22% tax.

If you are a HRT payer, and you get a £10K payment from your employer, £4K goes to Gordon, and £6K goes into your pocket.

To reclaim Gordon's £4K you need to put in £10k (gross), so you make a £7800 net payment into the plan. The Tax man then refunds £2200 into your plan so at this stage you're £1800 down on the deal (£6000 went into your pocket, but £7800 went out of it into the pension plan)

Then, when you fill in your tax return, you declare the total pension payments you have made over the year. The tax man will then adjust your tax bands, and refund/credit you the 18% difference - and gives you back £1800.

It all comes out in the wash - Just make any pension payments assuming 22% tax. Obviously, the if the tax man owes you money, the sooner you send in your tax return, the sooner you'll get back your £1800. Don't wait till the end of January.

Cheers,
Judwin

TCA

Judwin wrote: »

You always need to make pension contribution net of 22% tax.

If you are a HRT payer, and you get a £10K payment from your employer, £4K goes to Gordon, and £6K goes into your pocket.

To reclaim Gordon's £4K you need to put in £10k (gross), so you make a £7800 net payment into the plan. The Tax man then refunds £2200 into your plan so at this stage you're £1800 down on the deal (£6000 went into your pocket, but £7800 went out of it into the pension plan)

Then, when you fill in your tax return, you declare the total pension payments you have made over the year. The tax man will then adjust your tax bands, and refund/credit you the 18% difference - and gives you back £1800.

It all comes out in the wash - Just make any pension payments assuming 22% tax. Obviously, the if the tax man owes you money, the sooner you send in your tax return, the sooner you'll get back your £1800. Don't wait till the end of January.

Cheers,
Judwin

Many thanks Judwin,

TCA.