New to pensions, higher tax earner

smtelt

Apologies for very simple question but I can't quite understand the online calculators. I think I can save £40,000 into a pension each year and this includes my contributions and my employers contributions (it is a workplace pension). Is the government tax relief included in the £40,000? I think I would get 20% tax relief immediately and then have to reclaim 20% through self-assessment. If I reclaim 20% through self-assessment is this paid to my bank account?

Currently have no pension to speak of and salary is £125,000. All debts paid off so now in a position to start pension.

So sorry for what is probably very obvious stuff.

Many thanks for any help.

zagfles

What kind of workplace pension is it? And what are the contribution rates/accrual rate?

xylophone

Have a look at this.

https://www.standardlife.co.uk/c1/guides-and-calculators/managing-your-pension-tax-relief.page



It seems that your employer's pension scheme operates "relief at source"? Check if this is the case.

https://www.nowpensions.com/help-centre/gateway/employee/general-information-gateway-help-centre/whats-the-difference-between-net-pay-and-relief-at-source

https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

Dazed_and_confused

then have to reclaim 20% through self-assessment.

Currently have no pension to speak of and salary is £125,000.

You cannot claim an extra "20%" from HMRC.

Assuming you are referring to a payment into a "relief at source" scheme then you would include the contribution on your Self Assessment return but it isn't as simple as you just getting an extra 20% tax relief.

Based on your post the pension contribution (assuming you pay an amount fully eligible for tax relief) will benefit you in two ways,

1). It will reduce your "adjusted net income" which is what determines your Personal Allowance. So if your £125k salary is all taxable salary ("salary" often isn't) and you have minimal other taxable income then a large pension contribution could prevent you from losing some or all of your Personal Allowance.

2). Your basic rate tax band will be increased by the gross contribution (amount you paid plus the basic rate tax relief added by the pension company). Which can in turn reduce the amount of higher rate tax payable.

Overall the two things can mean you will sometimes receive an additional 40% tax relief (more if Scottish resident for tax purposes) over had above the basic rate tax relief given at source. But some people might pay say £10,000 and only pay higher rate tax on £5. They cannot get an extra "20%" just because they have paid a little bit of higher rate tax.

Relief at source pension contributions form part of your Self Assessment calculation so any benefit - tax refund or smaller amount of tax owed - benefits you, it doesn't get added to the pension fund.

A good way to see the overall benefit is to complete your Self Assessment return but leave out the pension contribution (and do not send the return to HMRC yet). Have a look at the calculation and note the bottom line showing tax due or overpaid.

Then add in the pension contribution and look at the calculation again. This will show the correct amount due or overpaid (based on how you have completed the return) so you can see what difference the pension contribution has made.