Pension contribution to lower taxable income or increase basic rate limit?

Raphael88

Dear Community,

I am getting a bit confused about how pension contributions affect total tax due and would appreciate your help:

• Pay from all employments £108,250
• Ee pension contribs (deducted from salary slip). £1,751
• SIPP (Vanguard contribs)  £6,200

 

Would I be correct in understanding that:

• Pension contributions would reduce the gross income to £100,299
• Reduced personal allowance would be: £12,351 (from the default £12,500)
• Taxable income would be: £87,948
• Total tax due £27,679 (£37,500 x 0.2 + £50,448 x 0.4)?

I get a higher amount of income tax due through Self-Assessment where instead of reducing gross income, the pension contribution increases the basic rate limit.  

• Total income on which tax is due: £95,899 (£108,250 - £12,351)
• Total tax due £29,269 = (£37,500+£7951) x 0.2 + £50,448 x 0.4

 

Which is the correct treatment?

 

Lastly, in box 1 of Tax Reliefs what amount should be put down? I saw a note about not including payments made to my employer’s pension scheme which are deducted from pay before tax so not sure if this relates to the Ee pension contribs? If I were to exclude the £1,751, it would lead to higher taxes and where would I be able to see the benefits of making pension contributions besides tax relief?

Thanks in advance for your help 

Dazed_and_C0nfused

Relief at source pension contributions do not have any impact on your taxable income.  But they do increase your basic rate band.

They also reduce your adjusted net income, which the Personal Allowance is based on.

What method is used to pay the £1,751?  If it is net pay them you have already received the maximum possible tax relief and you do not include them on a Self Assessment return.

kuratowski

For the SIPP payment, the basic rate relief was already claimed by Vanguard and paid directly into the SIPP.  That's why you can't reduce your taxable income, because you would get the basic rate relief twice.  Instead you are entitled to the difference between higher rate and basic rate relief.  Which is accomplished by increasing the basic rate band.

Are the £6200 contributions to your SIPP the net amount you paid in, or the gross amount including tax relief claimed by Vanguard?  Because must include the gross amount on your SA return.

Be aware that after you submit your SA return HMRC will automatically assume you are going to make the same pension payments next year, so it will be adjusted in your tax code.  Which may be correct, but if you actually reduced your payment, you would want to tell them or end up with an underpayment.

Raphael88

kuratowski said:

For the SIPP payment, the basic rate relief was already claimed by Vanguard and paid directly into the SIPP.  That's why you can't reduce your taxable income, because you would get the basic rate relief twice.  Instead you are entitled to the difference between higher rate and basic rate relief.  Which is accomplished by increasing the basic rate band.

Are the £6200 contributions to your SIPP the net amount you paid in, or the gross amount including tax relief claimed by Vanguard?  Because must include the gross amount on your SA return.

Be aware that after you submit your SA return HMRC will automatically assume you are going to make the same pension payments next year, so it will be adjusted in your tax code.  Which may be correct, but if you actually reduced your payment, you would want to tell them or end up with an underpayment.

I see, that is useful. The £6200 is the actual amount that I transferred and Vanguard credited the account £7750. From what I understand from your comment I should use the latter?  

[Deleted User]

You should use the latter.

Raphael88

Dazed_and_C0nfused said:

Relief at source pension contributions do not have any impact on your taxable income.  But they do increase your basic rate band.

They also reduce your adjusted net income, which the Personal Allowance is based on.

What method is used to pay the £1,751?  If it is net pay them you have already received the maximum possible tax relief and you do not include them on a Self Assessment return.

Thanks, that is useful. I am not quite sure can we deduct from the below? Should I exclude? 

kuratowski

So £1750.56 worth of pension contributions were deducted from your pay.  How much was actually paid into your pension?  If the same amount then it is a net pay arrangement, and as Dazed says, you should leave it off your SA return.  Whereas, if tax relief was added on once it arrived in your pension, then it is a relief at source scheme, and you should treat it in the same way as the SIPP.

Raphael88

kuratowski said:

So £1750.56 worth of pension contributions were deducted from your pay.  How much was actually paid into your pension?  If the same amount then it is a net pay arrangement, and as Dazed says, you should leave it off your SA return.  Whereas, if tax relief was added on once it arrived in your pension, then it is a relief at source scheme, and you should treat it in the same way as the SIPP.

Thanks, I checked and tax relief was added once it arrived in my pension. 

So to confirm, the amount I should put down is 9,938.60 in box 1 of Tax Reliefs? 

	Employment (NEST)	Tax relief	Vanguard	Tax Relief
Apr-20	146.20	36.47	100	25
May-20	145.88	36.47	100	25
Jun-20	145.88	36.47	100	25
Jul-20	145.88	36.47	100	25
Aug-20	145.88	36.47	100	25
Sep-20	145.88	36.47	100	25
Oct-20	145.88	36.47	100	25
Nov-20	145.88	36.47	100	25
Dec-20	145.88	36.47	100	25
Jan-21	145.88	36.47	100	25
Feb-21	145.88	36.47	100	25
Mar-21	145.88	36.55	5,100	1,275
	1,750.88	437.72	6200	1,550	9,938.60

kuratowski

Yes, NEST is relief at source.  That number looks correct based on what you've posted.  (Although it differs from the payslip by few pence.)