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Pension Tax Relief

Im looking for a bit of clarification on this issue.

I would like to put £500pm into a personal pension, how does the basic tax relief work? In my mind i put in £500 and the tax man puts in another £125. However, the application form states this:

"The amount taken from your bank account will be less than the gross amount. The gross amount includes basic rate tax relief, which we will add automatically to your contributions and reclaim from HM Revenue & Customs"

Does this mean to pay in exactly £500 myself i need to actually pay in £625?

Comments

  • zagfles
    zagfles Posts: 21,281 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Chutzpah Haggler
    No other way round. You pay in £500, the pension company will claim £125 from HMRC and your pension will have £625 in it.

    So what they're saying is the gross amount is £625 but you only pay £500.

    If you pay 40% tax or claim tax credits you can get extra relief.
  • All you need to decide is how much you want to put in out of you monthly net income. the tax is added back on top of that via the pension provider and as said, if you are a 40% payer, the HMRC will increase you tax code to reflect the additional relief you can get
  • thenudeone
    thenudeone Posts: 4,462 Forumite
    Part of the Furniture 1,000 Posts Combo Breaker
    If you want to end up with £500 in your pension, you only need to give a cheque (or bank transfer or direct debit etc) for £400. The pension company will automatically claim back the tax you have already paid.

    Think of it like this: if your earn an extra £500 in wages, you only get £400 in your pocket after tax.
    If you give that £400 to a pension company, it becomes £500 once the tax is reclaimed.

    If you want to pay £500 out of your pocket, it will become £625 once tax is reclaimed.

    All this assumes you are a basic rate taxpayer.
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