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Is this a scam?

edited 30 November -1 at 1:00AM in Auto-enrolment
5 replies 953 views
lafrowdalafrowda Forumite
3 posts
edited 30 November -1 at 1:00AM in Auto-enrolment
Am I missing something? As far as I can tell, the tax relief I get is reduced substantially by the tax I have to pay on my contribution in PAYE.

PAYE
Employee Contribution 79.52
Tax on contribution 20% (14.00)

PENSION
Employee Contribution 79.52
Tax Relief 20% 19.58

Result only 7% 85.10

What have I missed?

Lafrowda

Replies

  • Paul_HerringPaul_Herring Forumite
    7.3K posts
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    Simpler example:
    If you contribute £80 out of net pay (having had 20%/£20 deducted for income tax) then you receive relief of 25% of that £80 (i.e. £20) to give you that tax relief.

    ===

    You've contributed £79.52. 25% of that is (almost) the £19.58 figure (i.e. you don't use 20% on that net figure to get the gross.) Incidentally, are you sure that figure isn't £19.88?

    It's not clear where those 7% or 85.10 figures are coming from.
    Conjugating the verb 'to be":
    -o I am humble -o You are attention seeking -o She is Nadine Dorries
  • Thank you for your reply Paul - Yes, my numbers are sketchy, but I thought for every £1 contributed the government paid-in .20 pence i.e. 20% ? In your simple example
    PAYE 20% of £80 is £16
    RELIEF 25% of 80 is £20 (A difference of £4)
    £4 is 5% of £80
    Not 20%
  • HappyHarryHappyHarry Forumite
    1K posts
    1,000 Posts Fifth Anniversary
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    This is how the numbers work:

    Pay = £100 gross
    Tax deducted = £20
    Net pay = £80

    Net Pension contribution = £80
    Tax relief =£20
    Total pension contribution =£100


    Yes, you get 20% tax relief on your pension contributions, but this refers to the 20% tax that was deducted from your pay.

    You are correct though, in that you do actually receive a 25% addition to your net pension contribution.
    I am an Independent Financial Adviser. Any comments I make here are intended for information / discussion only. Nothing I post here should be construed as advice. If you are looking for individual financial advice, please contact a local Independent Financial Adviser.
  • But isn't it obvious that this tax relief (our incentive so to speak) is reduced by the tax we have to pay on our contributions in our pay packets?
  • Paul_HerringPaul_Herring Forumite
    7.3K posts
    Part of the Furniture 1,000 Posts Name Dropper Photogenic
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    lafrowda wrote: »
    Thank you for your reply Paul - Yes, my numbers are sketchy, but I thought for every £1 contributed the government paid-in .20 pence i.e. 20% ? In your simple example

    No - you've paid tax of 20% to get to that £1, so you need 25% of that £1 to bring you back to the original amount.

    Gross £1.25. Tax of 20% is 25p, dropping it to £1.

    Put £1 in your pension, government refunds 25% of that (25p) bringing it back to £1.25.
    PAYE 20% of £80 is £16
    RELIEF 25% of 80 is £20 (A difference of £4)

    You're treating that £80 as gross in the first line and net in the second:

    - Gross of £80 gets taxed 20%(£16) to bring it to £64. 25% of £64 is £16.
    - Net of £80 was £100 which was taxed 20%(£20) to bring it to £80. 25% relief of £80 is £20.

    There's no loss going on here - you're simply confusing net pay which gets 25% relief with gross pay which gets taxed at 20%.
    Conjugating the verb 'to be":
    -o I am humble -o You are attention seeking -o She is Nadine Dorries
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