Tax relief of paying lump sum in to pension.

UKSBD

I've not really looked in to this properly yet, so just hypothetical 

I've read that if I add to my pension the Gov adds another 25%

Ie. I add £100k £125k is actually added to pot.

Assuming pension pot is £300k add  £100k gov adds another £25k

Pot is now £425k - Next day I take out the £100k tax free and remaining pot is £325

I'm back to inital place of having my £100k but my pension pot has now increased by £25k

Am I missing something here or is this just a too simplistic way of looking at things?

NoMore

There's limits around how much you can contribute and get Tax relief.

125k contribution would require at least the same in earnings for that year and also require carry over of previous years Annual Allowance which may or may not be available. The Annual Allowance is 60k per year and is a limit on all contributions to pension in a single year. You also need to have relevant UK earnings to claim the tax relief.

Withdrawing the 100k depending on how you did it, could result in considerable tax. 

dunstonh

I've read that if I add to my pension the Gov adds another 25%

It can be viewed that way but technically its a relief which means its a reduction in what you pay.  i.e. if you pay £10,000 into a pension, your contribution is actually £8,000.       The difference equates to a 25% uplift but from a tax point of view, its actually a 20% reduction.       Same outcome but if you think of it as a bonus added on, that can lead to calculation errors later.   Such as when higher rate relief comes into play, or personal allowance tapering or full tapering or annual allowance use or carry forward use.

Linton

UKSBD said:

I've not really looked in to this properly yet, so just hypothetical 

I've read that if I add to my pension the Gov adds another 25%

Ie. I add £100k £125k is actually added to pot.

Assuming pension pot is £300k add  £100k gov adds another £25k

Pot is now £425k - Next day I take out the £100k tax free and remaining pot is £325

I'm back to inital place of having my £100k but my pension pot has now increased by £25k

Am I missing something here or is this just a too simplistic way of looking at things?

Assuming that:
1)  This is a contribution to a SIPP (or similar) or an employee contribution to an employer  DC pension that uses Relief At Source (RAS).
2) You have sufficient earnings in the current tax year to cover a £125K  contribution.
3) You have not exceeded the pension Annual Allowance (£60K with some roll-over from previous years)

the numbers are correct, but you could have withdrawn 25% of £425K tax free.


Whether that is a too simplistic way of looking at things rather depends on what conclusions you draw.