Reduce Tax Rate by Pension Contribution?

spartacus173500

I saw something similar recently but can't find again .....

As I have found on HMRC site - FY12/13
Basic Rate Tax - 20% £0 to £34,370
(FY13/14 £32,010, FY14/15 £31,865)
Higher Rate Tax - 40% £34,371 to £150,000

If I earn circa £55k, have a Tax Allowance of £8,105, and contribute circa £6k to a Company Pension - this gives me circa £41k of taxable income.

Can I pay £10k into another Pension and so reduce Tax Band to £31k level, and also get tax relief on contributions - double win - or have I missed something?

Can I carry out similar exercise for previous years?

CLAPTON

well for 2012/3 tax allowance was 8105
and 20% tax band is to 34,370


so 40% tax starts at 8105 + 34,370 i.e. 42,475

jamesd

You can only get pension tax relief for the tax year in which you made the pension contributions, so you can't make contributions now to reduce your tax bill in previous years.

Yes, you can make pension contributions into a personal pension to reduce your income tax liability. If you want to make £10,000 of higher rate pension contributions, pay £8,000 into a personal pension. The pension provider will add 25% to give you basic rate tax relief and increase the amount in the pension pot to £10,000 and once you notify them HMRC will increase your basic rate tax band to give you the remaining £2,000 of higher rate tax relief.

If you do it regularly you can tell them in advance and they will adjust your tax code to give you the relief during the year.

It's also worth considering using the company pension if contributions are made by salary sacrifice with some employer matching or sharing of the National Insurance saving they make. The 2% employee NI saving alone isn't great.