Can I get more tax relief than tax paid ?

aznlayer

I have searched the web for the answer to this question and I can't seem to find the information I need. 

If my income is £18,000 per year, after my personal allowance of £12500, I pay tax on £5,500 (which at 20% is £1100)

My understanding is that I can get tax relief up to my annual earnings of £18,000 (which in theory is 20% of £18k = £3,600)

If this was right, I would actually earn more in tax relief than what I paid in tax. Is this correct or if tax relief capped at what tax I have actually paid? 

kuratowski

How do you make your pension contributions?  I.e. are they deducted from your gross pay by your employer?  Or do you personally pay into a Stakeholder Pension/SIPP out of your net pay?  Or something else?

aznlayer

Thanks Kuratiwski. 

The plan is to pay directly into a personal pension each month, not through an employer 

Dazed_and_C0nfused

It is possible yes.  There is a massive thread all about turning £2,880 into £3,600 in these circumstances.

What has happened to your normal pension contributions, you can't just ignore them.

Albermarle

I would actually earn more in tax relief than what I paid in tax. Is this correct or if tax relief capped at what tax I have actually paid? 

Basic rate tax relief  is payable on taxable income , regardless of what your personal allowance is, and what tax you have actually paid.

Might seem a bit odd but it is just the way the system works. 

Are you self employed ?

kuratowski

If you are paying into a personal pension, you will automatically get 20% tax relief on your entire contribution.  The main thing for you to check is that your total contributions (to all pension schemes) don't exceed your annual earnings.  But as Dazed_and_C0nfused says, it's possible for the tax relief to exceed your tax paid.

aznlayer

I have about £12,000 in a pension pot, but I am about to be self employed. 

I am 35 and my partner is 40 (no children). We have just paid off our mortgage and now need to sort retirement out. My partner is a teacher and pays into his teachers pension.

I don't want to shove everything into retirement, but would like to put away about £1000 per month. We have joint finances are considering putting it all into a private pension as I get an instant 20% boost. When I retire, I am not likely to draw much above the personal allowance mark as I am a bit of a hippy and dont spend much and I am not aiming for a massive pension pot. 

Have I missed something really obvious though? I am scared about making such a big financial decision because I am not confident with investments. I know there is a no right and wrong answer, but if anyone reads this and thinks its flawed, please let me know   

aznlayer

Thank you for your replies, it's much appreciated. 

kuratowski

I think you shouldn't put all your savings in a pension, which you won't be able to access until 58 - consider also S&S ISA so you can get access to the money if you really need it.  The extra boost from tax relief is nice, but not if it leaves you short for the next 20 years!

For clarity, still make contributions to a pension but have a S&S ISA as well.

Albermarle

aznlayer said:

I have about £12,000 in a pension pot, but I am about to be self employed. 

I am 35 and my partner is 40 (no children). We have just paid off our mortgage and now need to sort retirement out. My partner is a teacher and pays into his teachers pension.

I don't want to shove everything into retirement, but would like to put away about £1000 per month. We have joint finances are considering putting it all into a private pension as I get an instant 20% boost. When I retire, I am not likely to draw much above the personal allowance mark as I am a bit of a hippy and dont spend much and I am not aiming for a massive pension pot. 

Have I missed something really obvious though? I am scared about making such a big financial decision because I am not confident with investments. I know there is a no right and wrong answer, but if anyone reads this and thinks its flawed, please let me know   

If you get 20% relief on the way in and do not pay tax on the way out then you have a big gain. Remember though that the state pension will be taxable although you will be in your late 60's before this kicks in and you will be able to take this private pension 10 years earlier.
I think the point you may have missed is that a pension is only a tax wrapper /admin vehicle. Your money is actually invested in funds within the pension and it is important that you are invested in the right sort of funds that suit your age and risk tolerance.
Are you going to start a new pension or contribute to the one that already has £12 K in it ? Whichever it is , if you say the anme of the provider and what funds it is invested in , then you should  get some useful feedback ( if you want it:)  ) 

aznlayer

My pension pot is with the peoples pension right now, but I am happy to move it into another provider. 

apart from the management fee, how do you know whether they are a good investment? are you supposed to look into what they invest in? or should I look into how well it performs each year?

Am I naive in thinking that I should go with a company name that I recognise and hence my money should be safer like legal and general or Aviva ?