company pension and higher rate tax question

adrian_bond

hi all!

I have only just learnt (apologies for being slow) that the higher rate tax rate is being lowered this year and next to around £32k. At the moment I am 31 and earning 31K so with hard work and meeting my deadlines I should hopefully command the £32k limits by next year!

now my question is this- I currently pay 11% into my company pension, which is met by my employer contribution at 4%. I currently get the standard basic 20% tax break (ish) on my contribution (I don’t have a forecast yet as I have only just been paying in a year so far).

Once I hit the 40% bracket, can I elect to have all of my pension contributions paid with 40% tax back, or will it only be 40% on the meagre portion over the limit of tax levels, with the vast majority at 20%?

I hope I have explained myself - so please let me know if you need clarification! thanks everyone

Adrian

ozzage

The second, I'm afraid.

Think of it this way: the tax relief for pensions just gives you back the tax you've already actually paid. So you can't get 40% relief on income where you've only paid 20%.

p00hsticks

adrian_bond wrote: »

hi all!

I have only just learnt (apologies for being slow) that the higher rate tax rate is being lowered this year and next to around £32k. At the moment I am 31 and earning 31K so with hard work and meeting my deadlines I should hopefully command the £32k limits by next year!

I think you may have missed the fact that you have a personal tax allowance that you can also use - £8,105 for this year. You only start paying tax at rates above this - first at 20% and then at 40% when you reach the higher rate band. This year the higher rate comes in at £34,371.

So assuming you are on the standard tax code of 810L (meaning you have the standard tax allowance ) you can earn £8,105 + £34,370 = £42,475 in this tax year before you're eligible to pay higher rate tax.

So you should be ok for a few years yet !

P.S. Although you are correct in saying that the higher rate band came down this year, this is to keep the start at the band at the same amount each year given that the tax allowance increases - so last tax year the allowance was £7,475 and the 40% band came in at £35,001, meaning you could again earn £42,475 before you started paying 40% tax.

Andrew_Cottrell

adrian_bond wrote: »

I have only just learnt (apologies for being slow) that the higher rate tax rate is being lowered this year and next to around £32k. At the moment I am 31 and earning 31K so with hard work and meeting my deadlines I should hopefully command the £32k limits by next year!

You also need to take in to account the Personal Allowance which is £9,440 for 2013-14. Generally, you will pay higher rate income tax on your earnings above £41,450.

HRMC - Income Tax rates and allowances

grey_gym_sock

so the starting point for higher rate is being reduced next tax year, but from £42,475 to £41,450.