income from drawdown and tax bands

sheramber

xylophone wrote: »

The OP's drawdown income is not relevant income for pension contribution purposes.

However, if he takes sufficient drawdown income, he will owe a certain amount of tax at 40%.

He can regard his drawdown income as a replacement for part of his current earned income and therefore be in a position to increase his contributions to his workplace pension.

In this way he can avoid 40% tax on his total income?

He doesn't want to avoid 40% tax. He wants to get pension payment relief of 40 % by increasing his income with drawdown.

sheramber

Dazed_and_confused wrote: »

But his earnings are not £50000. He has said they are below the 40% rate band.
So he only gets 20% relief on his earnings.
It is only when he adds in the drawdown that he becomes liable to 40%
It is similar to if he had savings income instead of pension income. Neither are relevant earnings

His "salary" may be £50,000 and his defined contribution pension payments are likely to be deducted from gross salary rather than being relief at source so normally they would result in 40% relief - without the pension contribution tax is due on pay of £50,000 but with the pension contribution tax is only due on £45,000 so the majority of the pension contributions have saved the op 40% tax.

A knock on consequence of this is that instead of the pension income all being taxed at 40% (had the taxable pay from employment been £50,000) some of it will be taxed at 20% because the defined pension contribution has reduced the taxable pay to £45,000

Example with no pension contribution
Employment £50,000
less Personal Allowance £11,850
Pay to be taxed £38,150
£34,500 x 20% = £6900
£3,650 x 40% = £1460

Pension income
£3,000 x 40% = £1200

Total tax payable £9,560

Example with 10% pension contribution (not relief at source)
Salary £50,000
less pension contribution £5,000
Taxable salary £45,000
less Personal Allowance £11,850
Pay to be taxed £33,150
£33,150 x 20% = £6630

Pension income
£1,350 x 20% = £270
£1,650 x 40% = £660

Total tax payable £7,560

He does not say his salary less pension payments is under the higher rate limit.
He does not say his tax liability is under the higher rate limit.

he says his total income is under the higher rate limit and only goes into higher rates when £3000 drawdown is added.

if his salary is below 46150 then adding in the drawdown to his income will not give him higher rate relief on his pension payments just because his total income is now over the higher rate limit.

crimsoid

Thanks for your comments and interest.
To clarify the points made by Sheramber I can confirm that my salary less pension payments is under the higher rate limit and that my tax liability is also under the higher rate limit.
"Which? Money" has a pension tax calculator that shows that for each £1 that your income exceeds the 40% tax limit then you are entitled to claim 20p tax relief on pension contributions.
Before I retire I may well move my deferred pension pot into drawdown and take £3,00 per annum just to see what happens!

zagfles

crimsoid wrote: »

Thanks for your comments and interest.
To clarify the points made by Sheramber I can confirm that my salary less pension payments is under the higher rate limit and that my tax liability is also under the higher rate limit.
"Which? Money" has a pension tax calculator that shows that for each £1 that your income exceeds the 40% tax limit then you are entitled to claim 20p tax relief on pension contributions.
Before I retire I may well move my deferred pension pot into drawdown and take £3,00 per annum just to see what happens!

What do you think will happen? You want to create a 40% tax liability so you can get relief of that liability?? Completely pointless. A bit like sticking your hand in a fire so you can get the relief of taking it out again.

Reluctantpensioner

Crimsoid, I'm worried that you are not listening to what people are telling to you.
I'll try to repeat some important points.

Once you draw any money from a pension you will be severely limited into what you can later pay in (£4K/year). This limitation applies forever. Your "to see what happens" can never be reversed.

If your total income in the year is high enough: income from a pension scheme may be taxed at 40% . BUT: you cannot get tax relief on income from a pension. HMRC screws you both ways.