Pension Contribution

MissHap

As opposed to the tax payer giving me a lot more just because i earn £1 over the limit rather than £1 under?

woolly_wombat

NoMore wrote: »

Apparently there is a loophole that 10000 to 11850 earners do fall into where they won't get tax relief but it is to do with the method their employer would make contributions to their pension.

http://www.thisismoney.co.uk/money/pensions/article-5622281/Low-paid-workers-denied-720-year-free-Government-pension-cash.html

That somewhat confusing article concerns pension schemes that operate a so-called 'net pay' scheme (e.g. NHS and LGPS) where your employer deducts your pension contribution from your pay before Income Tax is deducted. That means anyone who earns less than the Personal Allowance (currently £11,850) misses out on the government top up (£2000 in the original example).

Ross Altmann was highlighting the injustice of net pay arrangements for the low-paid.

HappyHarry

MissHap wrote: »

As opposed to the tax payer giving me a lot more just because i earn £1 over the limit rather than £1 under?

Not a lot more.

The way some employer pension schemes work is that the pension contribution is taken from an employees pay before tax is accounted for. This is called the "net pay" basis, and can disadvantage those on low incomes. There are regular comments on this, and pressure is being put on employers to change this unfair system.

Under this system, someone earning £11,851 that puts £10 into a pension, gets £10 added to their pension. Their taxable income is reduced to £11,841, and so the individual saves 20 pence tax on the £1 that was above their personal allowance of £11,850.

Someone earning £11,849 that puts £10 into a pension, gets £10 added to their pension, and their taxable income is reduced to £11,839. This individual wouldn't have had to pay any tax regardless of the pension contribution, so you could argue they have missed out on saving 20 pence in tax.

The real issue comes when you look at someone earning £30,000 under this scheme. If they put £10 into a pension, then £10 goes into their pension. Their taxable income is reduced to £29,990, and so they have saved £2 in tax, effectively 20% of their pension contribution.

However, by paying into a personal pension, this issue disappears, and full tax relief can be obtained for lower earners.

woolly_wombat

MissHap wrote: »

As opposed to the tax payer giving me a lot more just because i earn £1 over the limit rather than £1 under?

Not relevant unless you are subject to 'net pay' arrangements, which you can determine from your payslip.

See:
https://www.gov.uk/workplace-pensions/managing-your-pension

MissHap

What about if i make the contribution via a SIPP?

HappyHarry

MissHap wrote: »

What about if i make the contribution via a SIPP?

From my previous post:

"However, by paying into a personal pension, this issue disappears, and full tax relief can be obtained for lower earners."

xylophone

Just a question - does your employer offer a pension scheme?

MissHap

Just a question - does your employer offer a pension scheme?

Yes, we both pay 3%

lisyloo

MissHap wrote: »

Just a question - does your employer offer a pension scheme?

Yes, we both pay 3%

When are you planning to retire?
Have you checked the forecasts produced?

xylophone

Is your Workplace Scheme "relief at source"?

If so, is there any reason why you are not considering making additional contributions to this scheme?

Remember that you need to take into account contributions made to your workplace scheme if you intend to contribute to another scheme.