Pension lump sum payment to offset 40% tax

236dave

Hi,
I'm 55 and looking to build up my private prudential pension, its a draw down type. My aim is to transfer savings into my pension each year by an amount which offsets the 40% tax payments I make in my current employment.

My gross earnings allowing for benefits in kind etc = £62,746
What size lump sum payment will I need to make into my pension to offset the 40% tax payments I make in my current employment?
And how is it calculated?

Can anyone help, its very confusing to me.
Thanks

xylophone

https://www.aegon.co.uk/support/faq/pension-technical/claiming-tax-relief-pp-faq.html

236dave

Thanks xylophone , followed your link and have calculated the following:

(11.5k personal allowance + 22.8k lump sum payment +28.5k gross payment) = £62.8k , ie earnings required to reclaim the full 40% tax amount.

So a £22.8k payment into my pension would initially get 20% relief (£5.7k), increasing my pension pot by £28.5k. I could then reclaim an additional 20% relief through my tax code of £5.7k

Have I calculated this correctly?
Thanks for your help!

btw: I rang HMRC, and they calculated it like this:
33.5k + 11.5k = 45k (earnings above this amount is taxed at 40%)
so 62.8k earnings - 45k = 17.8k (amount to contribute to pension that gets 40% relief)
Have they got it wrong?

Dazed_and_confused

You haven't said if you are Scottish tax resident or are resident elsewhere in the UK so cannot say for certain but you don't actually get a fixed extra 20% tax relief.

The pension payment increase the amount of basic rate tax you can pay which in turn reduces the amount which would be taxed at 40%.

So using £62,746 as a taxable income figure you would be taxed (outside of Scotland)
£11,500 - Personal Allowance no tax
£33,500 x 20%
£17,746 x 40%

So if you were to make a SIPP/private pension contribution of £14,197 your pension company would add the basic rate relief of £3,549 giving s gross contribution of £17,746.

Your basic rate tax band would be increased by £17,746 to £51,246 so all income being taxed would be at 20% rate not 40%, saving you £3,549.

If you contributed £22,800 net you would get £5,700 basic rate relief and your basic rate band would be increased to £62,000 but as you only have, after Personal Allowance, £51,246 income to be taxed the higher rate tax relief is still only going to be £3,549.

Remember you need to consider any other taxable income such as savings interest, it isn't just taxable salary/benefits which are taken into account in your overall tax calculation.

236dave

Dazed_and_confused wrote: »

You haven't said if you are Scottish tax resident or are resident elsewhere in the UK so cannot say for certain but you don't actually get a fixed extra 20% tax relief.

The pension payment increase the amount of basic rate tax you can pay which in turn reduces the amount which would be taxed at 40%.

So using £62,746 as a taxable income figure you would be taxed (outside of Scotland)
£11,500 - Personal Allowance no tax
£33,500 x 20%
£17,746 x 40%

So if you were to make a SIPP/private pension contribution of £14,197 your pension company would add the basic rate relief of £3,549 giving s gross contribution of £17,746.

Your basic rate tax band would be increased by £17,746 to £51,246 so all income being taxed would be at 20% rate not 40%, saving you £3,549.

If you contributed £22,800 net you would get £5,700 basic rate relief and your basic rate band would be increased to £62,000 but as you only have, after Personal Allowance, £51,246 income to be taxed the higher rate tax relief is still only going to be £3,549.

Remember you need to consider any other taxable income such as savings interest, it isn't just taxable salary/benefits which are taken into account in your overall tax calculation.

Thanks, I'm not Scottish, and a payment of £14,197 is closer to what I was expecting. I expect to have savings interest in the region of £500 - £700 in this tax year. I can't see this making a huge difference.

Thanks again for your detailed and helpful response :T
Dave