FHL Pension Tax Relief

mr_tash
mr_tash Posts: 16
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Using the following figures, can someone please tell me how much of FHL income would need to be paid into a private pension (relief at source) to avoid paying higher tax, with the calculations to understand how you get that amount?

PAYE - £40,000 (gross pay after workplace pension contributions)

Personal allowance - £12,570

Savings interest - £1,000

FHL income - £15,000 (£5,000 allowable expenses)

Thanks to anyone who can help. I’ve spent the last couple of weeks trawling the internet to understand how it works but I’m not confident of my understanding so it will be very much appreciated.

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  • Dazed_and_C0nfused
    Dazed_and_C0nfused Posts: 12,709
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    mr_tash said:

    Using the following figures, can someone please tell me how much of FHL income would need to be paid into a private pension (relief at source) to avoid paying higher tax, with the calculations to understand how you get that amount?

    PAYE - £40,000 (gross pay after workplace pension contributions)

    Personal allowance - £12,570

    Savings interest - £1,000

    FHL income - £15,000 (£5,000 allowable expenses)

    Thanks to anyone who can help. I’ve spent the last couple of weeks trawling the internet to understand how it works but I’m not confident of my understanding so it will be very much appreciated.


    Is the £40k the pay figure that will be on your P60?

    Are the FHL profits definitely £10k?

    Which method is used for the workplace pension?  If RAS then you need to provide the gross contribution you will make into the workplace pension in the current tax year (assuming that's the one you are asking about).
  • mr_tash
    mr_tash Posts: 16
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    Is the £40k the pay figure that will be on your P60?

    Are the FHL profits definitely £10k?

    Which method is used for the workplace pension?  If RAS then you need to provide the gross contribution you will make into the workplace pension in the current tax year (assuming that's the one you are asking about).

    The £40k would appear on my P60

    FHL numbers are example amounts

    With my workplace pension, the money is taken before I'm taxed - net pay arrangement?


    I'm not using actual amounts, these numbers are for an example. If I'm able to understand how to do the calculations I will apply them to my actual estimates later this month and base my pension contribution on that.

    Thank you.


  • Dazed_and_C0nfused
    Dazed_and_C0nfused Posts: 12,709
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    edited 4 February at 2:50PM
    mr_tash said:

    Is the £40k the pay figure that will be on your P60?

    Are the FHL profits definitely £10k?

    Which method is used for the workplace pension?  If RAS then you need to provide the gross contribution you will make into the workplace pension in the current tax year (assuming that's the one you are asking about).

    The £40k would appear on my P60

    FHL numbers are example amounts

    With my workplace pension, the money is taken before I'm taxed - net pay arrangement?


    I'm not using actual amounts, these numbers are for an example. If I'm able to understand how to do the calculations I will apply them to my actual estimates later this month and base my pension contribution on that.

    Thank you.


    So in your example amounts is the FHL profit definitely £10k i.e. the amount on your Self Assessment return you would be taxed on?
  • mr_tash
    mr_tash Posts: 16
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    So in your example amounts is the FHL profit definitely £10k i.e. the amount on your Self Assessment return you would be taxed on?
    In my example, yes.

    Don't tell me I've used figures that won't even qualify for higher rate tax in my example :D


  • Dazed_and_C0nfused
    Dazed_and_C0nfused Posts: 12,709
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    edited 4 February at 3:51PM
    mr_tash said:
    So in your example amounts is the FHL profit definitely £10k i.e. the amount on your Self Assessment return you would be taxed on?
    In my example, yes.

    Don't tell me I've used figures that won't even qualify for higher rate tax in my example :D


    No, not at all.

    Without any RAS contributions you would be taxed like this (after deduction of the Personal Allowance).

    £27,430 x 20% (basic rate on earnings)
    £10,000 x 20% (basic rate on FHL)
    £270 x 0% (savings nil rate within basic rate band)
    £230 x 0% (savings nil rate within higher rate band)
    £500 x 40% (savings higher rate)

    With a £730 gross RAS contribution (£584 of which is what you pay over before basic rate relief is added by the pension company) it would become,

    £27,430 x 20% (basic rate on earnings)
    £10,000 x 20% (basic rate on FHL)
    £1,000 x 0% (savings nil rate within extended basic rate band)

  • mr_tash
    mr_tash Posts: 16
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    Thank you D&C

    A very helpful and clear breakdown that I needed.

    Interesting to see that FHL expenses don't reduce the £37,700 basic rate band, I just assumed they would.

    I've been doing some number crunching with my estimated figures and £15k isn't too far away for FHL income but the expenses are around £10k so much less profit. If FHL expenses don't reduce the basic rate band, then it's possible I won't even qualify for the higher rate tax.

    So the basic rate band increases the same amount as gross pension contributions, reducing taxable pay by the same amount?
  • Dazed_and_C0nfused
    Dazed_and_C0nfused Posts: 12,709
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    mr_tash said:
    Thank you D&C

    A very helpful and clear breakdown that I needed.

    Interesting to see that FHL expenses don't reduce the £37,700 basic rate band, I just assumed they would.

    I've been doing some number crunching with my estimated figures and £15k isn't too far away for FHL income but the expenses are around £10k so much less profit. If FHL expenses don't reduce the basic rate band, then it's possible I won't even qualify for the higher rate tax.
    I'm not sure you're really following this, or we are at cross purposes with what you wanted to understand?

    It's the FHL profit which is included in the calculation of your tax liability so the expenses would never be a feature of that as they are deducted when calculating the profit.

    If you had turnover of £15k and no expenses then another £5k would be taxed and a lot more higher rate tax would be payable (using the other figure from your example).

    If your profit is only £5k then you are some way short of any higher rate liability.

    So the basic rate band increases the same amount as gross pension contributions, reducing taxable pay by the same amount?

    I don't know how you have arrived at that conclusion 🤔.

    RAS pension contributions increase your basic rate band (as shown in my example) but they don't reduce the amount of income you pay tax on.  You have the same amount of income to be taxed but the increased basic rate band can mean some income moves from being taxed at 20% to being taxed at 40%.

    And in more unusual situations like your example they can also mean you get the benefit of the full £1,000 savings nil rate band rather than just £500.

  • mr_tash
    mr_tash Posts: 16
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    I'm not sure you're really following this, or we are at cross purposes with what you wanted to understand?
    I get the FHL profit bit. Your breakdown cleared this up for me. I haven't explained myself very well with the expenses/tax band thing but we can ignore that. I totally get this bit! 

    So the basic rate band increases the same amount as gross pension contributions, reducing taxable pay by the same amount?

    I don't know how you have arrived at that conclusion 🤔.

    Somewhere around here I'm getting lost. But at the same time I understand the breakdown and why you've said a £730 gross pension payment brings all the savings into the extended basic rate band. You've given me the clear breakdowns and explanations I need, will take some time for it to click :#

    Thank you again
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