Contributing for someone else.. Benefits?

ChilliBob

Hey guys,
An idea has been suggested to me that sounds pretty good, but I just want to run it by the crew in here for their views. 

My partner earns circa 40k and is a basic rate tax payer. She contributes to a pension as does her employer.

I have been told if I make a contribution to her pension, which means her contributions match her earnings she will pay no tax. 
So, theoretically, let's say
1. She earns 40k, contributes 10k go her pension.
2. I contribute 24k
3. Government tops it up to 30k
Does this mean:
1. She pays no tax, saving perhaps 6k?
2. Gov contributes 6k
3. Resulting pension pot is iht free for each other our our son?

This sounds like a good idea I just want go make sure I have my facts straight before making any decisions. 
Thanks

Dazed_and_C0nfused

Making relief at source pension contributions will have absolutely no impact on her personal income tax liability in the circumstances you describe.

They would have a very small impact if she is Scottish resident for tax purposes.

She would receive the basic rate tax relief on any qualifying contribution.

ChilliBob

Hmm! I must have misunderstood what I was told then. So, if she contributed 100% of her income herself, would she pay income tax? 

Dazed_and_C0nfused

Yes, it would make absolutely no difference to her personal income tax position.

Relief at source contributions only save you personal income tax if you are a higher rate payer, liable to the HICBC (a few basic rate payers are from 6 April 2021) or are liable to the intermediate tax rate in Scotland (21%).

Maybe you are thinking of net pay contributions?  But then she wouldn't get the £6k relief at source added to her pension fund.

Marcon

ChilliBob said:

Hmm! I must have misunderstood what I was told then. So, if she contributed 100% of her income herself, would she pay income tax? 

Very many websites happily tell you that you can contribute '100% of earnings' but are rarely clear about the fact that what you pay in to the pension scheme is 80% of your earnings and the provider then reclaims basic rate tax relief on your behalf and adds that to the pot - that's how you 'pay 100% of your earnings' to a pension. So yes, she'd still pay tax on her earnings, but the tax relief would then head for her pension pot.

If she is over 75 when she dies, any payout from her pension pot is subject to income tax (not IHT).

Dazed_and_C0nfused

To be honest I'm not even sure the way you would want it to work is even a good idea.

Depending on the method used for the normal £10k contributions she might only be paying tax on £30k.  Which for most people would be £3,500.

So you could get 70% more tax relief using relief at source method anyway.

Steve182

ChilliBob said:

Hmm! I must have misunderstood what I was told then. So, if she contributed 100% of her income herself, would she pay income tax? 

My wife is self employed and works part time, and typically earns around £16K

Twice a year I move some of our money into her SIPP, say £10K in April (topped up to £12.5K) then again in March once we know what her total earnings are likely to be, so if we estimated that year it will be £16.5K we would move a further £3K in March, topped up to £3.75K so the total (£16.25K) was just below 100% of her earnings.

She still pays income tax just the same, but her pension contributions gets topped up.

If however she was a HRT payer her pension contributions would still be topped up by 25% as the example above, but after completing her self assessment she would also receive a tax rebate of 20% of the pension contribution she paid from taxable income above HRT threshold.
 

Dazed_and_C0nfused

That is a perfect real life example, Mrs Steve182 is likely only paying c£700 on income tax.

But getting £3,250 in pension tax relief added to her pension fund.

ChilliBob

Hmm, I did think it wasn't quite right! It was actually in an intro call from an ifa! 

Dazed_and_C0nfused

There are several different methods of getting money into a pension and they all work in slightly different ways and can have different tax benefits depending on the individuals circumstances/taxable income.

Steve182

Dazed_and_C0nfused said:

That is a perfect real life example, Mrs Steve182 is likely only paying c£700 on income tax.

But getting £3,250 in pension tax relief added to her pension fund.

Furthermore, she will only have a modest sized pension pot, and we both plan to retire well before our SP age.

Using her full £12.5K personal allowance in the years between her retirement and her SP, it should be possible to drawn down the whole pot completely tax free, and reinvested what we don't spend in ISAs, so it really is a "no-brainer"