Applicable rate of tax relief for pension contribution

TheGreenFrog

I understand that furnished holiday let profits are eligible for tax relief if contributed to a pension.  A relative has approximately £10,000 a year FHL profits.  All other taxable income is from interest and dividends.  If the total income including the FHL profits exceeds the 40% tax threshold, at what rate is relief given for a pension contribution up to the level of FHL profit - 20% or the marginal rate?  Or is it more compliacted than that?

Dazed_and_C0nfused

If a qualifying contribution can be made, either the £3,600 non earners amount or say £10,000 then the provider will only ever add 25% (to the net contribution).

This equates to 20% of the gross contribution.  For example the relative adds £4,000 then the pension company will add £1,000 in basic rate tax relief making a gross contribution of £5,000.  They would never add more than this whatever tax rate the relative pays.

But the gross contribution increases the basic rate band meaning more income can be taxed at 20% and less at 40%.

The gross contribution also reduces adjusted net income which is used to calculate HICBC and tapered Personal Allowance.

TheGreenFrog

Thank you @Dazed_and_C0nfused, I think I understand.  So if the FHL profits are £10,000 then presumably the maximum gross contribution is £10,000?  So £8,000 actually contributed with £2,000 paid into pension scheme by HMRC.  And then when declared on tax return effect is to reduce further the overall tax liability, and so in this case in effect the net cost is £6,000 (if marginal rate of the £10,000 is 40%)?

Dazed_and_C0nfused

TheGreenFrog said:

Thank you @Dazed_and_C0nfused, I think I understand.  So if the FHL profits are £10,000 then presumably the maximum gross contribution is £10,000?  So £8,000 actually contributed with £2,000 paid into pension scheme by HMRC.  And then when declared on tax return effect is to reduce further the overall tax liabaility, and so in this case in effect the net cost is £6,000 (if marginal rate of the £10,000 is 40%)?

Nearly.

A £10,000 gross contribution is made by handing over £8,000 to the pension company.

The personal tax saving might be another £2,000 but there is no fixed extra 20%.

Say £10,000 gross is contributed by a higher rate payer who is liable to higher rate tax on £3,000.  Then the pension contribution will normally only save £600 in income tax (£3,000 taxed at 20% rather than 40%).

Although this could mean different savings such as becoming eligible for Marriage Allowance or an increased savings nil rate band (aka Personal Savings Allowance).

It does all depend on the individuals overall tax position.