Calculating taxable income - pension deductions

A_Fortiori_99

Hi all,

Can anyone confirm whether contributions which I make to my pension from my salary count towards my taxable income for the year? I am asking for reasons relating to the personal savings allowance.

I've set out below a hopefully straight forward scenario along with a couple of statements which reflect my understanding (if anything I have said below is wrong, I would much appreciate being corrected!)

Scenario

My salary is £50,271. I therefore (a) have a personal savings allowance of only £500, and (b) pay tax on any savings interest above this at 40%. Both of these apply as I am a higher rate taxpayer.

Question

Can I reduce my taxable income by contributing £1 per year into my pension, therefore giving me a personal savings allowance of £1,000 (i.e. give myself an extra £500 of savings interest which will be taxed at 0% rather than 40%)?

The reason for the question

I am trying to maximise my tax-free savings interest and, if the answer to the question above is 'yes', then (a) I would be able to ensure an additional £500 of tax-free savings interest, and (b) I would potentially be able to pay tax at 20% rather than 40% on any savings interest over the PSA (not in the scenario above, but if I were to contribute say £500 to my pension instead of £1, then that would mean an extra £500 which would be taxed at 20% rather than 40%, assuming this was over and above the PSA)

I know that the scenario outlined above is the most 'extreme' case, but it seems that in those circumstances making a deduction of £1 to my pension would mean, in addition to the tax relief on that £1, a net gain of £200 on my savings interest (i.e. 40% of £500), assuming I had oodles of savings in taxable savings accounts?

TL;DR Is 'taxable income' calculated by reference to my gross annual salary (i.e. before taking into account any deductions for pension contributions) or to my gross annual salary minus pension contributions?

Thanks in advance!

Isthisforreal99

You need to add the interest onto your salary as your starting point for establishing PSA. e.g. taxable salary of £50k and £2k interest means a PSA of £500.

It depends what method you are using to contribute to your pension.

Salary sacrifice or net pay arrangement will reduce taxable income. Relief at source payments will increase your basic rate band.

Dazed_and_C0nfused

A_Fortiori_99 said:

Hi all,

Can anyone confirm whether contributions which I make to my pension from my salary count towards my taxable income for the year? I am asking for reasons relating to the personal savings allowance.

I've set out below a hopefully straight forward scenario along with a couple of statements which reflect my understanding (if anything I have said below is wrong, I would much appreciate being corrected!)

Scenario

My salary is £50,271. I therefore (a) have a personal savings allowance of only £500, and (b) pay tax on any savings interest above this at 40%. Both of these apply as I am a higher rate taxpayer.

Question

Can I reduce my taxable income by contributing £1 per year into my pension, therefore giving me a personal savings allowance of £1,000 (i.e. give myself an extra £500 of savings interest which will be taxed at 0% rather than 40%)?

The reason for the question

I am trying to maximise my tax-free savings interest and, if the answer to the question above is 'yes', then (a) I would be able to ensure an additional £500 of tax-free savings interest, and (b) I would potentially be able to pay tax at 20% rather than 40% on any savings interest over the PSA (not in the scenario above, but if I were to contribute say £500 to my pension instead of £1, then that would mean an extra £500 which would be taxed at 20% rather than 40%, assuming this was over and above the PSA)

I know that the scenario outlined above is the most 'extreme' case, but it seems that in those circumstances making a deduction of £1 to my pension would mean, in addition to the tax relief on that £1, a net gain of £200 on my savings interest (i.e. 40% of £500), assuming I had oodles of savings in taxable savings accounts?

TL;DR Is 'taxable income' calculated by reference to my gross annual salary (i.e. before taking into account any deductions for pension contributions) or to my gross annual salary minus pension contributions?

Thanks in advance!

To really understand this you need to know which method you are using to get money into your pension.  Some reduce your taxable income but not all.  However the method that doesn't works in a different way that has the same overall benefit.

And you need to factor in all taxable income, all reducing it by £1 would do is take your non savings non dividend income down to £50,270.  But the fact you are asking about the savings nil rate band (aka Personal Savings Allowance) shows you have other taxable income.

Also, interest from an ISA is "tax-free", non ISA interest is all taxable, even if some is taxed at 0%.

So the first key question is do you use,

Relief at source
Net pay 
Salary sacrifice

Albermarle

An alternative point is that if your salary is say £60K and you contribute £10K to a pension, the benefit of getting 40% tax relief, will far outweigh the personal savings allowance increase of £500.