Pension tax relief for basic rate taxpayer when wanting to maximise contributions

mramra

Hi all

Hopefully a simple question. If I earn £35k per year, can I contribute £35k gross (£28k net) and get 20% tax relief on the whole amount?

I believe this is correct, but it's slightly confused me as 20% tax wasn't paid on the whole £35k due to the personal allowance of £12.5k on which no tax was paid.

Thanks in advance

Dazed_and_confused

You are confusing two separate things.

There is no direct correlation between the tax you personally pay and the tax relief due on a "relief at source" pension contribution. There are plenty of posters on here who aren't liable to pay any tax whatsoever but contribute £2,880 each year and get this grossed up to £3,600 with basic rate tax relief.

If you are Scottish resident for tax purposes you will be due a small adjustment to your personal income tax liability as a relief at source contribution increases the amount of basic rate tax you can pay. Marginal gains as Dave Brailsford would say

NB. Is your employers or auto-enrolment pension relief at source or have you forgotten to take into account contributions to an existing pension scheme?

mramra

Thanks for the reply. I'm resident in England. I do have a NEST auto-enrolment pension as well and understand I would have to deduct these contributions from my pay to give me the amount left to contribute. I left out this detail for simplicity as my main question was whether 20% is added on regardless of contribution level (subject to the limit of total earnings). I think you've clarified that, thanks.

jamesd

Yes, assuming the final 12.5 gross is into a relief at source pension and not via workplace salary sacrifice.

Employer contributions don't count towards the 35k but do count towards the 40k annual allowance.

mramra

No salary sacrifice. Other than NEST, all contributions are paid from net pay into a stakeholder pension so are relief at source.

Therefore think I'm correct that to take maximum benefit of tax relief available I take my £35k gross pay, subtract personal contribution into NEST, then multiply by 80% to give the net amount I need to contribute into my stakeholder (to which Sajid Javid will kindly add 25% for me so that the gross 100% amount ends up in the pension).

Paul_Herring

I believe this is correct, but it's slightly confused me as 20% tax wasn't paid on the whole £35k due to the personal allowance of £12.5k on which no tax was paid.

If contributing out of net pay, yes. It can be thought of as an extension of the £2880 (£3600 gross) that someone not earning anything can contribute.