Using Pension contributions to offset upper income tax?

solidpro

Hi

I'm likely to earn £63,000 in FY 2016/17 and 17/18

As I understand it, the upper rate of tax in 2016-17 is £32000 and the following year likely to be slightly higher, which added to the income tax allowance of £10,600 gives me a total of £42,600 below the upper tax bracket and £20,400 above it.

I work out 40% of £20,400 to be £8160 income tax due on that £63,000?

If I paid in £20,400 into a pension the same year, would I completely offset that £8160 by reclaiming 40p in each pound of those pension contributions?

Is my reckoning correct?

kidmugsy

I suggest you transfer this question to the pensions etc board.

agrinnall

kidmugsy wrote: »

I suggest you transfer this question to the pensions etc board.

I don't see why, it's certainly as much a tax question as it is a pensions one, and increasing pension contributions is regularly suggested as a means of reducing tax on this board.

OP, I suspect you are more or less correct (you may only need to reclaim 20p as the first 20p could be accounted for anyway) but it's not an area that I'm an expert on, I'm sure someone else who does know will provide a definitive answer.

CLAPTON

solidpro wrote: »

Hi

I'm likely to earn £63,000 in FY 2016/17 and 17/18

As I understand it, the upper rate of tax in 2016-17 is £32000 and the following year likely to be slightly higher, which added to the income tax allowance of £10,600 gives me a total of £42,600 below the upper tax bracket and £20,400 above it.

I work out 40% of £20,400 to be £8160 income tax due on that £63,000?

If I paid in £20,400 into a pension the same year, would I completely offset that £8160 by reclaiming 40p in each pound of those pension contributions?

Is my reckoning correct?

basically yes

if you pay into a personal type pension then you would actually pay
20400 x 80%= 16,320 as your pension provider will automatically reclaim the basic rate 20% tax for you
you are left to claim the other 20% tax direct from HMRC

solidpro

Hi

Where did you get the 80% from? I basically don't pay any basic rate tax because it's all in Dividends which the company has already paid CT on (apart from this new tax thing the chancellor brought in this year coming up on dividends). However when I hit the 40% threshold I seem to basically pay the 40% in the pound above that.

Thanks

CLAPTON

solidpro wrote: »

Hi

Where did you get the 80% from? I basically don't pay any basic rate tax because it's all in Dividends which the company has already paid CT on (apart from this new tax thing the chancellor brought in this year coming up on dividends). However when I hit the 40% threshold I seem to basically pay the 40% in the pound above that.

Thanks

dividends aren't earnings

solidpro

They're my earnings on my self assessment.

CLAPTON

solidpro wrote: »

They're my earnings on my self assessment.

dividends aren't earnings

solidpro

Ok thanks for all your help.

booksurr

solidpro wrote: »

Ok thanks for all your help.

In case you come back and read this - pension contributions can only be made from "relevant UK earnings" - dividend income does not qualify as such earnings and so cannot be used.

It is one of the downsides for company owners who take dividends instead of salary. If you want to pay into your pension scheme the company would have to do so directly on your behalf as you do not have earnings you can use yourself

here is the first google result: http://adviser.royallondon.com/pensions/technical-central/information-guidance/contributions-and-tax-relief/pension-contributions-the-basics/

solidpro

I asked in the Pension's board and they said they're not frequented by tax experts so I should post it in the tax board.