Pension contributions and Personal Savings Allowance

TomJ

The withdrawal of the income tax personal allowance can be mitigated by making pension contributions, as per the Reclaiming Personal Allowance discussion here (or here in chrome, as whoever wrote the page has done something silly in their html). I was wondering whether the same applied to the Personal Savings Allowance.

To work an example in the same way as the PruAdviser discussion:

Mr J earns £44000 from employment and £1000 from non-ISA savings interest. He would therefore owe £6400 in basic rate income tax, £400 in higher rate tax on his income and £200 in tax on his interest (40% of (£1000 interest less £500 PSA)). Total tax £7000, balance £37000.

He decides to make a pension contribution of £1600 net, which is grossed up to £2000 into the pension pot and attracts £400 higher-rate tax relief. Does the fact that there is no income left in the higher rate band also mean the Personal Savings Allowance remains at £1000, thus saving £200 in tax on the interest? If so this would leave Mr J with paying tax of £6400, a pension pot of £2000 and a balance of £35600; in effect a pension pot of £2000 for a "cost" of £1400.

It seems rather too good to be true, but may just be the upside of the quirk Martin blogged here. I would be interested if someone who knows the precise details of the regulations could see whether this would actually work.

EDIT: It was too good to be true as I started throwing figures around before caffeinating my brain. Figures above corrected. Thinking further, Mr J would be left with an after pension contribution income of £43000, a personal allowance of £11,000 and a personal savings allowance of £1000, leaving £31000 to be taxed at 20%: that's mean a tax liability of £6200, a pension pot of £2000 and a balance of £35,800; a pot of £2000 for a cost of £1200.

LXdaddy

If you use pension contributions to reduce your earned income so that the total of earned income plus "non-ISA savings interest" is below the Higher rate threshold then yes, you will be a basic rate tax payer and eligible for a £1,000 personal savings allowance.

zagfles

AIUI the rule is that if you pay any HRT then the PSA is cut to £500. So yes pension contributions can take you out of HRT. If you use a personal pension, the basic rate band is extended and if you use a workplace pension or sal sac then gross pay is reduced. Effect is the same for the same gross contribution.

Pensions contributions can reduce your income for all sorts of other stuff too - the PSA is actually fairly trivial when compared with other stuff. For instance the child benefit withdrawal, tax credits, university loan assessments/bursaries, universal credit, housing benefit...