Pension tax relief and National Insurance

cnm

I want to ask how National Insurance affects pension tax relief.
For a basic rate tax worker, for each £1000 they earn above the Personal Allowance, £120 (12%) is National Insurance, £200 (20%) is income tax, and they receive £680.
If they pay £680 into a SIPP, then the pension provider will reclaim a further 25%, meaning that £680 + £170 = £850 goes into their pension.
So they paid £200 tax, but the tax relief on their pension contribution is only £170.
Is this correct - that, because of NI, the tax relief they get (£170) isn't quite as much as the tax they actually paid (£200)?
Or am I missing something?

zagfles

You don't get NI relief paying into a personal pension, or even a workplace pension using "net pay". You can only get NI relief using salary sacrifice.

cnm

Sorry - I wasn't expecting to get NI relief.
I'm just noting that the tax relief (£170) doesn't seem to match up with the tax which was paid (£200). I had assumed that the tax relief would be equal to the tax paid - i.e. £200, but it doesn't seem to be.
I only mentioned NI because it seems that paying NI causes this difference between tax relief and actual tax paid.

NoMore

Your mistake is thinking about a £1000 pound and all the tax and charges related to that, when thats not what you contribute to the pension.

You state that you put 680 into a pension and get 170 back. This is correct and is the return of your 20% tax on that contribution not the original £1000 which your trying to relate it to.

Paul_Herring

Is this correct - that, because of NI, the tax relief they get (£170) isn't quite as much as the tax they actually paid (£200)?
Or am I missing something?

You're missing a subtlety.

Ignore NI for the moment...

£1000 => £200 IT, £800 net.

£800 into pension would attract 25% rebate of £200 putting you back where you were. And is the £200 you're thinking of.

However bringing back NI reduces that £800 net by £120 to £680. Putting that in attracts 25% which is the £170.

You 'lose' the £120 in NI, which means (if you don't make it up in your contribution from another £1000 slice that's been taxed and NI'd) you can't claim the remaining 25% (the £30 that's 'missing') on that bit of the amount.

cnm

Thanks all - clear now that amount of tax relief is not equal to the amount of tax originally paid, as I had originally incorrectly assumed.

Dazed_and_confused

You don't actually have to have paid any income tax to get pension tax relief.

The turn £2880 into £3600 trick often used by low earners/non taxpayers is a common theme on this board