Calculating Pension Contribution

Tom99

[FONT=Verdana, sans-serif]I would like to make a further pension contribution this year, in order to avoid paying any tax at 40%.

[/FONT] [FONT=Verdana, sans-serif]I have calculated that I will pay 40% tax on £2,500 of my salary this tax year
.[/FONT]
[FONT=Verdana, sans-serif]In addition I expect £750 of savings interest of which I understand £250 would be taxed at 40%

[/FONT] [FONT=Verdana, sans-serif]What is the minimum amount I need to contribute in order to avoid both those elements of 40% tax. Is it £2,500 or some higher figure?

[/FONT] [FONT=Verdana, sans-serif]I do not want to over contribute because I do not want part of the contribution to only attract 20% tax relief.

[/FONT] [FONT=Verdana, sans-serif]Thank you.[/FONT]

Linton

You pay in 80% of the amount on which you are paying 40% tax: £2750*0.8=£2200. HMRC will refund £550 into your pension making your gross contribution £2750. They will then return the higher rate part of the tax, another £550, directly to you as a tax refund after the end of the tax year (or possibly via your taxcode if you let them know about your extra pension contribution).

Tom99

Linton wrote: »

You pay in 80% of the amount on which you are paying 40% tax: £2750*0.8=£2200. HMRC will refund £550 into your pension making your gross contribution £2750. They will then return the higher rate part, another £550, directly to you as a tax refund after the end of the tax year (or possibly via your taxcode if you let them know about your extra pension contribution).

[FONT=Verdana, sans-serif]Thank you. Apologies for not adding that the pension contribution will be to my employers 'Added Pension' scheme.

[/FONT] [FONT=Verdana, sans-serif]So if I pay £2,500 then that amount comes from my gross salary and I will automatically receive 40% tax relief on it that month.

[/FONT] [FONT=Verdana, sans-serif]What I am not sure about is if contributing exactly £2,500 will then mean I am entitled to the £1,000 saving income at 0% or whether my contribution needs to be higher in order to achieve that.[/FONT]

BoGoF

I believe that to remain entitled to the £1000 savings allowance you will nees to pay enough to cover all income in excess of the basic rate band

bigadaj

Tom99 wrote: »

[FONT=Verdana, sans-serif]Thank you. Apologies for not adding that the pension contribution will be to my employers 'Added Pension' scheme.

[/FONT] [FONT=Verdana, sans-serif]So if I pay £2,500 then that amount comes from my gross salary and I will automatically receive 40% tax relief on it that month.

[/FONT] [FONT=Verdana, sans-serif]What I am not sure about is if contributing exactly £2,500 will then mean I am entitled to the £1,000 saving income at 0% or whether my contribution needs to be higher in order to achieve that.[/FONT]

Always best to calculate things gross (unless you're Ruud Gullitt), which to be fair you are doing, in which contribute all your income to get below the higher rate tax threshold.

Apodemus

Tom99 wrote: »

Thank you. Apologies for not adding that the pension contribution will be to my employers 'Added Pension' scheme.

So if I pay £2,500 then that amount comes from my gross salary and I will automatically receive 40% tax relief on it that month.

It might be worth making doubly sure that this is how your scheme works. When I did something similar, the lump sum was not grossed up by the scheme, but claimable as a tax rebate at year end.

Linton

If the pension payment comes from your gross salary this is before any tax is calculated and so you would never be charged higher rate tax in the first place.

But in making the figure £2500 you would seem to have neglected your savings income on which you would continue to pay higher rate tax. To avoid this you would need to add the excess £250 to your pension contribution.

msallen

Linton wrote: »

If the pension payment comes from your gross salary this is before any tax is calculated and so you would never be charged higher rate tax in the first place.

But in making the figure £2500 you would seem to have neglected your savings income on which you would continue to pay higher rate tax. To avoid this you would need to add the excess £250 to your pension contribution.

In fact you would need all the £750 interest to your contribution as this will be added to your salary to make your taxable income.

Tom99

[FONT=Verdana, sans-serif]Thank you all. The replies offer varied advice, but I think if I have to add something at all it will be £750.[/FONT]
[FONT=Verdana, sans-serif]Calc of income to see if Higher rate taxpayer would then look like:-[/FONT]
[FONT=Verdana, sans-serif]£47,500 + £750 = £48,250[/FONT]
[FONT=Verdana, sans-serif]So I will need to contribute £3,250 to the pension to come to £45,000.[/FONT]
[FONT=Verdana, sans-serif]If anyone can point me to the .gov website that would confirm this I would be grateful. I can find plenty of references to the £1,000 saving at 0% dropping to £500 but nowhere is a definition of what constituted a higher rate taxpayer for this test.[/FONT]

Linton

msallen wrote: »

In fact you would need all the £750 interest to your contribution as this will be added to your salary to make your taxable income.

Yes, I agree. I simply took the £250 from the original posting which in the OPs circumstances is wrong.