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Pension Moneysaving Article Question

http://www.moneysavingexpert.com/savings/discount-pensions

Im having a bit of difficulty understanding the concept of the £100 pension investment...do I need to actually contribute £100?

I currently contribute £71 a month to my companies pension scheme.

I feel quite stupid asking this question, but ho-hum :rolleyes:

Comments

  • dunstonh
    dunstonh Posts: 118,562 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    £100pm would be a £78 direct debit (using 07/08 tax year).
    £71pm from your payslip is costing you £55.38.

    payslip is paid gross, direct debit it paid net.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • So I actually put £55.38 in from my pay?
  • If you make a £71 pension contribution through your payslip, you would see £71 coming off your gross taxable pay. But that would lead to a reduction in the tax you pay of £15.62 (22% of £71) and therefore your take-home pay would fall by only £55.38 as dunstonh says.
  • purch
    purch Posts: 9,865 Forumite
    ..........as clear as MUD :eek:
    'In nature, there are neither rewards nor punishments - there are Consequences.'
  • What's unclear, purch?

    If you pay pension contributions out of your pay, they are deducted from your pay BEFORE tax deductions are calculated, so you get tax relief on your pension contributions at your highest rate.

    So, to make a pension contribution of £100 will only cost you £78 (because you'll save £22 in tax).

    If you pay pension contributions separately, say through a standalone stakeholder pension, you pay the contributions NET of tax. So to get £100 into your pension, you pay just £78. The pension provider then reclaims the £22 of tax from HMRC so the full £100 is invested in your pension.

    Either way, pension contributions get the same tax relief at your marginal tax rate. The mechanism differs, but the outcome is the same.
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