Basic Rate Tax?

Jobchange

I think I am missing something here, please forgive my stupidity. I just don't understand why if I was to put £80 monthly in my pension and the government give me 20% tax relief and I end up with £100! Surely that is 25%? In my world they would top up with £16 not £20!
Thanks.

TH1878

Jobchange wrote: »

I think I am missing something here, please forgive my stupidity. I just don't understand why if I was to put £80 monthly in my pension and the government give me 20% tax relief and I end up with £100! Surely that is 25%? In my world they would top up with £16 not £20!
Thanks.

The 20% tax relief is based on the gross contribution. So 20% of the £100 gross contribution is £20.

You're right though, you actually get an uplift of 25% on your £80.

p00hsticks

One way of looking at it is....

If you earn £100, and the government taxes you 20%, you are left with £80. If you put that £80 into a pension, the government will put the £20 it took away into it too....

greenglide

The gross amount is £100 the tax relief is 20% of that which is £20 leaving £80 paid.

The reverse calculation doesn't work as the tax comes off the gross figure, not the net one.

Jobchange

Thank you. That makes sense now. I can totally see that 20% has been taken away and that amount is returned through relief.
My main confusion is with my PP (self employed) where I put in £600 and its topped up through provider getting £150 from HMRC. So it looks like the top up is 25%. Am I taxed then at end of year on the £600 and the £150 will be taken retrospectively?

bowlhead99

The 150 on your 600 looking like 25% is the same principle explained for the 20 top up on an 80 which looked like 25%.

You end up with 750 in the pot and it only costs you 600 in cash because they assume you have already paid 20% tax on your 750 earnings to leave you with the 600 that you're contributing.

If you haven't actually paid tax on your 750 yet, because you're saving up to pay the taxman at the end of the year, it doesn't matter too much. At the end of the year when you tell HMRC what you contributed to personal pensions via your tax return, it will all get sorted out. For example, if you actually earned enough to be a 40% taxpayer and you've only had the same relief as a 20% taxpayer, HMRC owe you some more tax relief (albeit, if you haven't paid all your tax for the year yet, it will serve to reduce your bill rather than be cash that they send you).

Jobchange

Thank you. That's clarified the situation. It will all get sorted out in the tax return.
Even when something is explained I have to work it out rather just accept an answer. So with all the above help it has sunk in (eventually) that it's 20% of the gross amount. :j