Is rental income factored in to tax relief calculations?

nohassles

Let's say I earn £50,000 in employment income (so just below the threshold for higher rate tax).
If I have a rental property that brings in £10,000 a year, then my combined income is within the bracket for higher rate tax.

If I choose to divert, say, £5,000 of my annual employment income to a pension scheme, would the tax relief be applied at higher rate or lower rate?

Qyburn

Assuming a "relief at source" scheme the pension will add Basic Rate tax relief, bumping your £5,000 up to £6,250.

In your example it looks like you'd still be over the HR tax threshold, so the difference would be reclaimed from HMRC. Paid to you, not into the pension.

Dazed_and_C0nfused

And even if you paid using the net pay method  you would still benefit from higher rate relief as you would have £5,000 less taxable income and the rental income profits would utilise the extra basic rate band now available.

Just because the earnings on there own aren't into the higher rate band doesn't change the fact you will get higher rate relief one way or another.

Simon11

Could you clarify: If I have a rental property that brings in £10,000 a year,

Are you talking about income or profit? You should only be considering profit in this scenario once you have deducted all the costs that you can by HMRC.

Marcon

nohassles said:

Let's say I earn £50,000 in employment income (so just below the threshold for higher rate tax).
If I have a rental property that brings in £10,000 a year, then my combined income is within the bracket for higher rate tax.

If I choose to divert, say, £5,000 of my annual employment income to a pension scheme, would the tax relief be applied at higher rate or lower rate?

Pension contributions will gain tax relief at the highest rate of tax you pay, regardless of what bumps you into 40% tax. 

You will need to have sufficient earned income to make the contributions (you do), and you will only get higher rate relief to the extent you paid higher rate tax in the first place. If you make a £5K contribution but only (say) £4K is taxed at 40%, you'll only get the higher rate relief on £4K.