Tax-relief on personal-allowance?

FatherAbraham

I've seen plenty of articles talking about the way that UK residents with no income whatsoever can still get tax relief on up to £3600 gross when controiubting to a pension, and what a great benefit that can be for some.

For those who do have "relevant" (non-investment) earnings, the limit rises to the entirity of those earnings, up to the annual limit (£50k, falling to £40k next tax year), I understand.

Presumably this means that potentially the entire personal allowance, where no tax is paid, can be tax relieved at 20%?

An acquaintance of mine earns about £9, so pays income tax at 20% on just over a thousand pounds. This person has some surplus capital from an inheritance, so presumably there could be a useful subsidy if several thousand pounds were paid into a pension fund (25% uplift from the state)?

Reducing income in this way seems also to have the benefit of permitting interest on bank deposits to be received without deduction from income tax (the acquaintance seems more interested in this, here-and-now benefit than the more abstract idea of getting tax relief on contribs which he or she has not paid income tax on).

Being able to tax-relieve the entire personal allowance (£8,105 in 2012/13) seems to be a huge benefit, but the headlines always seem to talk about the non-earners' £3.6k.

Perhaps I don't understand tax relief well enough.

gadgetmind

Yes, full taxable earnings can be put into a pension, which is pretty efficient for the reasons you observe. However, this depends on their tax position in retirement. They'll get 25% PCLS (assuming rules don't change) but might find themselves paying tax on other pension income after state pension age.

I think you've got a good handle on things.