Carry forward - steps and tax relief

btcp

It doesn’t look so simple to calculate myself how much tax exactly you can get back, I suppose the best way is just to wait till SA is due and let the system do the calculations? 

Basic tax relief is a good reason to use carry forward, anything which comes on top is only a bonus. 

Dazed_and_C0nfused

The simplest way to see the personal tax benefit (after the event) is to complete (but don't submit to HMRC) your Self Assessment return without the pension contribution.

Check the calculation and note the bottom line of tax due or overpaid.

Then add in the pension contribution and review the calculation again and the new bottom line.  The difference is the personal tax benefit to you.

It may be close to 20% of the gross contribution i.e. you have moved income from being taxed at 40% to being taxed at 20% but that assumes a lot and is rarely correct (HICBC can boost the benefit, retaining Personal Allowance for very high earners etc)

ratechaser

btcp said:

It doesn’t look so simple to calculate myself how much tax exactly you can get back, I suppose the best way is just to wait till SA is due and let the system do the calculations? 

Basic tax relief is a good reason to use carry forward, anything which comes on top is only a bonus. 

It's really not that complicated. Let's say, for the sake of argument, that you are on £100k salary and a have the standard personal allowances. That would mean that you are paying 40% income tax on 50k of your salary. 

Let's then say that you use your full 40k pension allowance in this tax year - that has the effect of bringing your taxable salary down to 60k, so you're only then paying 40% tax on 10k of it.

Now let's say you have 20k of unused pension allowance from the last tax year. You can by all means use this in the current tax year, but you'd only get 40% tax relief on half of it, because after the first 10k, you'd have pushed yourself below the 50k taxable income level for the year. You would of course still get basic rate relief on the other 10k. But you can't get more relief than the tax you actually paid, in the current year.

Dazed_and_C0nfused

Let's then say that you use your full 40k pension allowance in this tax year - that has the effect of bringing your taxable salary down to 60k, so you're only then paying 40% tax on 10k of it.

The op is thinking of making a relief at source contribution and those do not reduce your taxable income.

They increase your basic rate band.

btcp

The reason I say it may be complicated to calculate an exact tax relief because my income is not only salary. I have a bonus which depends on the company performance and RSUs vesting quarterly - not possible to predict exact numbers now. I also have health insurance and car allowance. 

ratechaser

 Noted regards relief at source, my mistake.

OP - ok, I get the income variability aspect, I have the same 'issues' - not least with the bonus and RSUs vesting pretty close to the end of the tax year. That's a reason that I opened a simple Vanguard SIPP that I could throw any additional contributions into once I'd got the final position on my taxable income for the year (and hence could work out what was optimal in terms of using carry forward in a particular year to maximise tax relief).

btcp

ratechaser said:

 Noted regards relief at source, my mistake.

OP - ok, I get the income variability aspect, I have the same 'issues' - not least with the bonus and RSUs vesting pretty close to the end of the tax year. That's a reason that I opened a simple Vanguard SIPP that I could throw any additional contributions into once I'd got the final position on my taxable income for the year (and hence could work out what was optimal in terms of using carry forward in a particular year to maximise tax relief).

Interesting, I’d like to understand it more. I don’t have SIPP, what is the benefit exactly vs investing extra cash in s&s isa in vanguard?