Help to understand Pension Tax Relief

FreshlyCutFlowers

Hello MSE users,
Background: I turned 30 and started a new job which uses 'Legal and General' as their pension scheme, as I suddenly felt old at 30, I thought this was the time to get serious about savings.. I've read up and figured out that I really need to allocate my money towards other funds than the legal and general default if I want a decent pension when I get older- this is a work in progress. However, right now I'm a bit embarassed as I struggle with the basics of pension tax relief.. I was immediately rolled onto 5% pension contributions, with the company contributing just 3%, for a total of 8%. My annual salary is £59000 and I want to maximize my tax relief (it seems like a no brainer, free money?).

I made this hopefully understandable sheet in excel but I'm almost certain I've misunderstood the system. Any help to how I can ensure I get the highest tax relief would be appreciated.

Row 3 - 4 is my current contributions. Net Salary includes NI and Tax before pension contributions.
Row 6 - 7 I thought I could follow the age divided by 2 rule for a total of 15% contribution. It results in ~£200 less per month which I can afford but also more importantly I thought is that I think it just about maxes out my 'higher tax payer' tax relief. I've not been able to find any information about it but my assumption is that out of my salary of £59000, only £9000 is eligible for 40% tax relief. In cell J7 you can see that I just about reached that.
Row 11 - 12 I set up this as an example of a less efficient tax relief. I would assume that once the grand total (J11) goes beyond the £9000 in my higher tax bracket, the remaining tax relief I get is just 20%.
Row 15 - 16 If my salary increases to 61000 for example, I can go all the way up to 18% contribution without exceeding the highest possible tax relief on the money contributed.

Dazed_and_C0nfused

What contribution method is being used?

Relief at source or net pay are the most common ones.

Or salary sacrifice but that means you wouldn't personally be contributing, your employer would be paying more.

FreshlyCutFlowers

Dazed_and_C0nfused said:

What contribution method is being used?
Relief at source or net pay are the most common ones.
Or salary sacrifice but that means you wouldn't personally be contributing, your employer would be paying more.

Thank you for replying!
I didn't realize there were options between before or after tax had been deducted..!

It is not a salary sacrifice for sure but I don't actually know if it is net pay or relief at source. How would I go about finding out?

Dazed_and_C0nfused

Just check your payslips.

If your salary (on a single payday) is say £5,000 and you pay £500 in pension contributions your taxable pay is likely to be either £5,000 or £4,500.

If it is £4,500 then it is "net pay" (this method guarantees the maximum possible tax relief with no further action required by you or anyone else).

AlanP_2

Row 11 - 12 I set up this as an example of a less efficient tax relief. I would assume that once the grand total (J11) goes beyond the £9000 in my higher tax bracket, the remaining tax relief I get is just 20%.

Haven't checked your maths but in principle you are correct, you can only get 40% relief up to the amount of 40% tax you would have paid.

FreshlyCutFlowers

Dazed_and_C0nfused said:

Just check your payslips.
[..]

Thanks again for your reply. I see that my Net pay is £3372.62 and my pension contribution is £196.67 Including AVC whereas the Employer contributed £147.50, giving a total of £344.17. 

I added a table below- the employer clearly pays 3% on my gross pay but I can't see a number that correlates to my pay?

Maybe I need a new thread but if it is related: I just read up on taxcodes and found that I'm on 1242L rather than 1250L.. Not really sure why- is this something I need to follow up on / that would affect the above?

Dazed_and_C0nfused

Your taxable pay suggests your income, for tax purposes is only £46-47k, not £59k.

What is dropping your salary from £59k to taxable pay/salary of £46-47k?

garmeg

FreshlyCutFlowers said:

Dazed_and_C0nfused said:

Just check your payslips.
[..]

Thanks again for your reply. I see that my Net pay is £3372.62 and my pension contribution is £196.67 Including AVC whereas the Employer contributed £147.50, giving a total of £344.17. 

I added a table below- the employer clearly pays 3% on my gross pay but I can't see a number that correlates to my pay?

Maybe I need a new thread but if it is related: I just read up on taxcodes and found that I'm on 1242L rather than 1250L.. Not really sure why- is this something I need to follow up on / that would affect the above?

3% is £147.50 and 5% is £245.83 suggests 4% is £196.67 which is your payment. The provider adds tax relief on this to your account, probably,

westy22

FreshlyCutFlowers said:

Dazed_and_C0nfused said:

Just check your payslips.
[..]

Thanks again for your reply. I see that my Net pay is £3372.62 and my pension contribution is £196.67 Including AVC whereas the Employer contributed £147.50, giving a total of £344.17. 

I added a table below- the employer clearly pays 3% on my gross pay but I can't see a number that correlates to my pay?

Maybe I need a new thread but if it is related: I just read up on taxcodes and found that I'm on 1242L rather than 1250L.. Not really sure why- is this something I need to follow up on / that would affect the above?

That's because you personally only pay a 4% contribution from your salary and then HMRC add a further 1% as your tax relief making a total of 5%. (£4,916.67 @ 4% = £196.67)

FreshlyCutFlowers

Dazed_and_C0nfused said:

Your taxable pay suggests your income, for tax purposes is only £46-47k, not £59k.
What is dropping your salary from £59k to taxable pay/salary of £46-47k?

I don't know..! To be clear, the taxable pay in my table is not from my payslip (It doesnt actually state 'taxxable pay' in the payslip) but I came to that number based on the 1242L taxcode in the payslip.
I just looked into how they work and assumed 1242L = £12420 Tax is free of tax leaving me with £59000 - £12420 = 46580.

Am I being taxed wrong? I've been at this taxcode and salary for a long time..!

FreshlyCutFlowers

westy22 said:

That's because you personally only pay a 4% contribution from your salary and then HMRC add a further 1% as your tax relief making a total of 5%. (£4,916.67 @ 4% = £196.67)

garmeg said:

3% is £147.50 and 5% is £245.83 suggests 4% is £196.67 which is your payment. The provider adds tax relief on this to your account, probably,

Thanks for pointing this out.
I would have thought that the government contribution would be higher to match the 40% pension tax as a higher tax payer?
As in my earlier chart. I calculated my own contribution by multiplying by 0.6 in cell F4- this matches the 3%. I expected the gov to then do the remainder, by multiplying it with 0.4 as you can see in the formula bar.
This sum would add up to £98.33 as seen in cell H4