Pension contributions from cash

anything123

Hey,

Trying to understand the workings of making pension contributions from cash.

Let's say we put £20k cash into a DC pension. This should have relief at source applied. So the calculation here is that the pension pot increases by 20k/0.8 = 25k. Is this correct?

The remaining 20% tax can then be claimed back on the tax return. So this appears as a credit for £5k and HMRC mail a cheque (or similar?)

So the net cost is £15k cash, for £25k in pension = net increase of £10k?

Dazed_and_confused

There is no additional fixed pension tax relief due.

A relief at source contribution, £25k in your example, simply increases the amount of basic rate (and intermediate rate if you are Scottish resident for tax purposes) tax you can pay. This in turn can mean there is less intermediate or higher rate tax to pay.

This forms part of your overall tax calculation for the year so the chances of if equalling a refund of £5k are slim to nothing.

To check the impact then you need to look at your Self Assessment calculation for the year without the contribution but with everything else included. Note the amount due/overpaid then add in the contribution and see what the difference is. That is the amount the contribution has saved you on top of the £5k added to your pension fund in the first place.

In some circumstances it can be more than 60% relief overall.

Linton

anything123 wrote: »

Hey,

Trying to understand the workings of making pension contributions from cash.

These answers assume you are a higher rate tax payer for ALL the £20k and have not breeched any of the contribution limits. Otherwise your tax relief could be less, possibly zero.

Let's say we put £20k cash into a DC pension. This should have relief at source applied. So the calculation here is that the pension pot increases by 20k/0.8 = 25k. Is this correct?

Correct

The remaining 20% tax can then be claimed back on the tax return. So this appears as a credit for £5k and HMRC mail a cheque (or similar?)
So the net cost is £15k cash, for £25k in pension = net increase of £10k?

Correct.

Dazed_and_confused

Being a higher rate taxpayer doesn't mean you will get an additional £5k tax relief though. It depends on your overall tax position for the year, including where you are resident for tax purposes.

anything123

Thanks very much for the answers folks. Couple of follow-ups inline.

Linton wrote: »

These answers assume you are a higher rate tax payer for ALL the £20k and have not breeched any of the contribution limits.

This is correct for my circumstances, thanks!

Dazed_and_confused wrote: »

There is no additional fixed pension tax relief due.

A relief at source contribution, £25k in your example, simply increases the amount of basic rate (and intermediate rate if you are Scottish resident for tax purposes) tax you can pay. This in turn can mean there is less intermediate or higher rate tax to pay.

Think I've got you. So you're increasing the basic rate tax payable, so this effectively raises the higher rate tax band by the amount that went into the pension. Does this include the relief at source?

For example, let's say higher rate normally starts at £50k, and you put £20k cash = £25k into the pension, higher rate now starts at £75k? Or £70k?

Dazed_and_confused wrote: »

This forms part of your overall tax calculation for the year so the chances of if equalling a refund of £5k are slim to nothing.

Practically though, assuming a simple tax return, paid the correct PAYE etc, £5k should be in the right ball-park though?

Dazed_and_confused wrote: »

To check the impact then you need to look at your Self Assessment calculation for the year without the contribution but with everything else included. Note the amount due/overpaid then add in the contribution and see what the difference is. That is the amount the contribution has saved you on top of the £5k added to your pension fund in the first place.

In some circumstances it can be more than 60% relief overall.

Hmm I'm projecting around £120k taxable income for the year, so 20k/0.8 = £16k+ into the pension, I should get the personal allowance back on £20k = extra £4k. Is this correct?

Also, is there a self assessment calculator that you'd recommend? IIRC the HRMC one isn't available until Apr 5th.

Linton

Dazed_and_confused wrote: »

Being a higher rate taxpayer doesn't mean you will get an additional £5k tax relief though. It depends on your overall tax position for the year, including where you are resident for tax purposes.

True, there are any number of things that could cause the OPs figures to be wrong. However in order to avoid confusing him/her I think it's a fair summary to say that the general mechanism described is correct but the precise numbers depend on the details of the tax position. We can go through the details should that be really necessary once we know more about income, tax residency etc etc

anything123

Dazed_and_confused wrote: »

Being a higher rate taxpayer doesn't mean you will get an additional £5k tax relief though. It depends on your overall tax position for the year, including where you are resident for tax purposes.

Currently resident in the UK but considering moving to Switzerland for reasons that are (painfully) obvious.

Dazed_and_confused

For example, let's say higher rate normally starts at £50k, and you put £20k cash = £25k into the pension, higher rate now starts at £75k? Or £70k?

£75k unless there are also Gift Aid contributions or you are Scottish resident for tax purposes.

Practically though, assuming a simple tax return, paid the correct PAYE etc, £5k should be in the right ball-park though?

In theory yes but as you have later alluded to it isn't that simple even for you.

Hmm I'm projecting around £120k taxable income for the year, so 20k/0.8 = £16k+ into the pension, I should get the personal allowance back on £20k = extra £4k. Is this correct?

Yes. The pension contribution will reduce your adjusted net income so, using your figures, full Personal Allowance will be restored which will in simple terms save you paying 40% tax on £10,000 of your income

So in this situation you will potentially end up with 60% tax relief. You give the pension company £16k and end up with £20k in your pension fund. Your personal tax liability is £8k less than it would otherwise be so that £20k pension fund has really only cost you £8k.

Also, is there a self assessment calculator that you'd recommend? IIRC the HRMC one isn't available until Apr 5th.

Not sure there is one this early in the tax year but you can use your 2018:19 return to track the impacts. Just don't forget to discard it rather than filing it with HMRC