Pension tax at source vs tax reclaim

gribbon

Hi all.

I'm having trouble trying to balance the following calculations regarding paying into a pension scheme. The final values add up, but I don't understand how the tax relief appears to be different.

Rounded amounts to make it easier to follow.
Let's say someone earns £45000 and wants to contribute 5% of their earnings to a scheme.

For at source contributions, according to income tax calculators including the one on MSE, they would be paying in 2250 per year, with extra tax relief of £900. For a total of £3150.

Now let's say they have a SIPP or personal pension and pay from their net wage. Using pension tax relief calculators, to pay in the same amount (3150) they need to contribute net £2520 which is grossed back to £3150 by a tax reclaim by the pension provider of £630. They can then reclaim the other 20% tax relief via PAYE/SA (another £630).

The end values are the same, they have £3150 in the pension. But I can't follow how there are apparently different amounts of tax relief. Have they in fact made / lost some tax relief, or have a missed a key calculation somewhere? (I suspect the latter).

jem16

gribbon wrote: »

For at source contributions, according to income tax calculators including the one on MSE, they would be paying in 2250 per year, with extra tax relief of £900. For a total of £3150.

For those types of calculators, £2250 is what ends up in the pension. The £900 tax relief is the amount of tax that you would pay less as it reduces your taxable income. That £900 doesn't go into the pension.

Now let's say they have a SIPP or personal pension and pay from their net wage. Using pension tax relief calculators, to pay in the same amount (3150) they need to contribute net £2520 which is grossed back to £3150 by a tax reclaim by the pension provider of £630. They can then reclaim the other 20% tax relief via PAYE/SA (another £630).

So to follow the above, you need to pay in a £2250 gross payment, so that would be £1800 net with £450 being added by the pension provider.

The extra 20% tax relief is then claimed so another £450 and therefore a total of £900 tax relief.

In both cases £2250 is what goes into the pension and £900 of tax relief is given.

gribbon

Thank you Jem, that all adds up now - the wording on the calculators is a little misleading

Assuming my second example above therefore equates to that person paying in 7% of their earnings?

jem16

gribbon wrote: »

Assuming my second example above therefore equates to that person paying in 7% of their earnings?

Basically yes.