Pension tax relief question

berbatov10

I will earn around £43,000 this year but will have £13,000 of other income (un earned). This give me a 'taxable' amount of £56,000.
My question is if for example I put £10,000 into a SIPP would I get £2000 as a basic rate tax payer and a further £2000 as a result of paying 40% tax on the sum over the threshold for the 40% tax level

PensionTech

Based on the figures you've given, if you put in £10,000 I think you would get around £5,900 back - some would go straight into the pension and some would need to be claimed back via your tax return. The easiest way to look at it is not how much extra tax relief you get on top of your contribution, but how much you want your total contribution to be (including tax relief) and then how much that costs you. For someone who would get HR tax relief on the whole lot, it would be easy:

Total contribution = X
Tax relief = 40%
Cost to you = £10,000

Cost to you = £10,000 = X * (1 - 0.4)

Rearranging for X you find that the total contribution would be £16,667 so your tax relief would be £6,667. However it's not quite that easy in your case as this would take you slightly under the HR threshold, so playing around with numbers gives you about £5,900 on top of your £10,000 contribution. There's a nice calculator here: http://www.hl.co.uk/pensions/interactive-calculators/tax-relief-calculator

However, there's a big "but" - this may not last for long, as the upcoming Budget announcements on 16 March are widely rumoured to include some kind of plan to reduce/scrap higher-rate tax relief on pension contributions. It's unlikely to take immediate effect but it is possible; if you want to benefit from HR tax relief, you may want to think about doing it before then.

jem16

PensionTech wrote: »

Rearranging for X you find that the total contribution would be £16,667 so your tax relief would be £6,667. However it's not quite that easy in your case as this would take you slightly under the HR threshold, so playing around with numbers gives you about £5,900 on top of your £10,000 contribution. There's a nice calculator here: http://www.hl.co.uk/pensions/interactive-calculators/tax-relief-calculator

If the OP puts £10k into a SIPP, basic rate tax relief of £2500 will be added on making it up to £12,500. The other £2500 will then be reclaimed via SA or an adjustment to the tax code making total tax relief of £5000.

Tax relief is always worked out on the gross amount, not the net amount.

berbatov10

Pension Tech to give greater clarity. Do my sums add up? I can get 40 % tax relief on £11,807 if I put it into a SIPP? (feel free to ell me I am wrong lol)
Income total £55945
Less Personal Tax code £12353
Less £31785 (taxable at 20%)
Sum taxable @ 40% £11807

jem16

berbatov10 wrote: »

Pension Tech to give greater clarity. Do my sums add up? I can get 40 % tax relief on £11,807 if I put it into a SIPP? (feel free to ell me I am wrong lol)
Income total £55945
Less Personal Tax code £12353
Less £31785 (taxable at 20%)
Sum taxable @ 40% £11807

Yes it's correct. Is your tax code higher as you already have an allowance for pension contributions or some other reason?

If it's £11,807 you would pay in 80% of that which is £9445.60 so £10k would be a little too high.

berbatov10

Hi Jem its a mix of allowance for pension contributions professional body subscription and clothing allowance. So if I put in £11807 the provider would claim back 20% on my behalf and I would claim back 20% (approx. £2360) on my tax return ? Ia m doing it now in the belief it will go to 30% across the board soon

jem16

berbatov10 wrote: »

So if I put in £11807 the provider would claim back 20% on my behalf and I would claim back 20% (approx. £2360) on my tax return ?

Yes it would.

berbatov10

Jem thanks for the assistance much appreciated. Have a great day

PensionTech

Tax relief is always worked out on the gross amount, not the net amount.

Edit: Ah - I'm with you - you're not talking about the self-assessment amount being deducted from the cost to the member to get to the £10k total cost, whereas I am. If the OP wanted to be £10,000 poorer his pension would be £15,900 richer (because he would contribute £12,720, the 20% £3,180 would go into the pension and he could then claim back the other £2,720 bring the cost back down to £10,000) - that's where I'm coming from.

Ignore the thing about the total gross cost of £15k; I got myself in a knot trying to figure out why we weren't agreeing. What I should have said is that your gross contribution of £12,500 results in a cost of £7,500 to the member, which is different from the problem I was trying to work out.

jem16

PensionTech wrote: »

Yes - but 40% tax relief on £15,000 (the gross amount you've got there) is £6,000 not £5,000.

Where? The gross amount I mentioned was £12,500.

I was puzzling this out too but from what I understand (and the HL calculator backs it up) a £10,000 gross contribution would cost the HR taxpayer £6,000 - by your logic it would cost the HR taxpayer £7143.

I can't see where.

A gross contribution of £10k, HL says you should pay in £8k and tax relief of £2k is added on. You then get another £2k via SA which means that your £10k contribution only cost you £6k - ie £8k actually paid in and then another £2k refunded through SA. It's not telling you that you get £6k tax relief.

I've no idea where you're getting £7143 from unless you are misunderstanding what the calculator is telling you which I think you are.

berbatov10

Pension Tech I thought the clue was in your name. I think as you say contribute £6k as HR taxpayer its made up to £0K by tax relief 20/40 %