How much am I actually saving?

Albermarle

So in order to get access to £1,000 in my pension I am effectively only paying £600 in the scenario you posted, correct? In which case I'm saving £400

When you withdraw from the pension, 25% is tax free and 75% taxable. The taxable part maybe taxed at 0%, 20% or even 40% depending on your total taxable income at the time.

If you are typical you get 40% tax relief on the way in and pay 15% on the way out. So still a great benefit.

Diesel3390

Albermarle said:

So in order to get access to £1,000 in my pension I am effectively only paying £600 in the scenario you posted, correct? In which case I'm saving £400

When you withdraw from the pension, 25% is tax free and 75% taxable. The taxable part maybe taxed at 0%, 20% or even 40% depending on your total taxable income at the time.

If you are typical you get 40% tax relief on the way in and pay 15% on the way out. So still a great benefit.

Thanks. How on earth does it work out to be 15% pay on the way out? If I'm on a 40% tax income, wouldn't I get taxed 40% on way out? How does it work out at 15?

Thanks

Dazed_and_C0nfused

If you are basic rate payer (with the pension income factored in) it works out like this,

Withdraw £100
£25 TFLS
£75 taxable income
£75 x 20% = £15 tax to pay

You take £100 from your pension and are left with £85 (£25 + £60)

Diesel3390

Dazed_and_C0nfused said:

If you are basic rate payer (with the pension income factored in) it works out like this,

Withdraw £100
£25 TFLS
£75 taxable income
£75 x 20% = £15 tax to pay

You take £100 from your pension and are left with £85 (£25 + £60)

Got it. Thank you. Makes sense.

Albermarle

Diesel3390 said:

Albermarle said:

So in order to get access to £1,000 in my pension I am effectively only paying £600 in the scenario you posted, correct? In which case I'm saving £400

When you withdraw from the pension, 25% is tax free and 75% taxable. The taxable part maybe taxed at 0%, 20% or even 40% depending on your total taxable income at the time.

If you are typical you get 40% tax relief on the way in and pay 15% on the way out. So still a great benefit.

Thanks. How on earth does it work out to be 15% pay on the way out? If I'm on a 40% tax income, wouldn't I get taxed 40% on way out? How does it work out at 15?

Thanks

Not very many people pay 40% tax in retirement, after they have stopped earning.

However getting 40% tax relief on pension contributions, and only paying 15% tax on withdrawal is quite common.
So I made an assumption, rightly or wrongly.

alanyau88

You can only get tax relief on your pension if you have earned income. Rental income is NOT earned income.

Bookworm105

CouldntResist said:

I'm not sure why this is so difficult. If you pay the post tax rental income into your pension then after the relief it effectively attracts no tax. Some of that relief may be outside the pension but if you have the cash you can pay that into the pension as well.

It's no more complicated than that. 

your choice of wording is technically incorrect since you cannot pay unearned income (net rental profit) into a pension fund 

OP is correct in thinking in terms of paying from their salary (earned income) an amount equivalent to their net rental profit into pension. 

alanyau88

As far as I understand it, there are limitations with this mental framing to get 40% tax relief back as it depends on how much the OP earns above the higher tax bracket.  For example, if he earns £43k personal income + £12k rental income, it would push him to the higher tax bracket but he can only claim about £3k of that for the 40% tax relief.  Anymore contributed to his SIPP will be only a tax relief of 20%.  So I don't think the mental framing is right.  Most people these days contribute to their pensions to make sure their personal income is just below the higher tax bracket.  Yes it saves on tax, but is this the most efficient use of your money?

Albermarle

alanyau88 said:

As far as I understand it, there are limitations with this mental framing to get 40% tax relief back as it depends on how much the OP earns above the higher tax bracket.  For example, if he earns £43k personal income + £12k rental income, it would push him to the higher tax bracket but he can only claim about £3k of that for the 40% tax relief.  Anymore contributed to his SIPP will be only a tax relief of 20%.  So I don't think the mental framing is right.  Most people these days contribute to their pensions to make sure their personal income is just below the higher tax bracket.  Yes it saves on tax, but is this the most efficient use of your money?

40% tax relief and then assuming you are a basic rate taxpayer in retirement ( not many 40% taxpayers in retirement),  then it is hard to beat the generosity of the higher rate tax relief. To the point that it is a bit of a mystery why the Treasury still allows it, because it costs them tens of Billions of Pounds a year.
Of course there will be cases where money is needed for other things, but filling your boots with 40% tax relief is often the best way forward for many people earning at a higher level.
However as you rightly say those earning well in excess of £50K, can take more advantage than those just earning a few grand above that level.