Pension Tax Relief when Gross Salary = Personal Allowance

intalex

Sidestepping the minimum wage constraint, if someone earning the personal allowance as an annual salary all of which is paid into their private pension in the following 2 ways, they would have different tax treatments:

Salary sacrifice - gross £12,570 into pension and considered inclusive of tax relief

Relief at source - net (= gross) £12,570 into pension + 20% tax relief (£3,142.50)

Is this correct?

Marcon

No. Maximum personal contribution would be based on gross contribution not net, so they would pay in 80% of their pay, which would be topped up with basic rate relief paid straight into their relief at source pension pot.

intalex

https://forums.moneysavingexpert.com/discussion/comment/82151711#Comment_82151711

Sorry, I'm confused by this statement, please could you outline what would go into the pension pot with each of the 2 methods above?

QrizB

Is this correct?

No, as under the RAS scenario they'd be exceeding their "relevant earnings" and HMRC would not be happy. Also your tax relief calculation is wrong.

It should read:

Relief at source - net (= gross) £10056 into pension + 20% tax relief (£2514)

intalex

https://forums.moneysavingexpert.com/discussion/comment/82151714#Comment_82151714

With the personal allowance, gross = net = £12,570

Nebulous2

If you are a non-taxpayer because your salary is equal to or less than your tax allowance, then relief at source is usually recommended here.

In the second example you have given you would earn £12570 but the most you could pay into a relief at source scheme would be £10, 056 which would have tax relief added to make it up to £12570 - leaving you with £2514 to live on.

Edit - messed up my figures there. Corrected now.

QrizB

https://forums.moneysavingexpert.com/discussion/comment/82151716#Comment_82151716

But they can't make a gross contribution - including tax relief - of more than £12570.

Of the £12570 they earn, they can only pay £10056 into a RAS pension (on which they'd receive £2514 tax relief). They would have to keep £2514 of their salary in their bank account (or spend it on wine, women and song).

Isthisforreal99

https://forums.moneysavingexpert.com/discussion/comment/82151716#Comment_82151716

Why do you keep repeating gross = net = £12,570. It makes zero sense.

intalex

Ok some inconsistent numbers, but I think I get it, the relief at source will need to be capped to max gross = £12,570 which means:

Salary sacrifice - gross £12,570 into pension and considered inclusive of tax relief

Relief at source - £10,056 max into pension + 20% tax relief (£2,514 max) but can still keep £2,514 of pay

intalex

https://forums.moneysavingexpert.com/discussion/comment/82151719#Comment_82151719

I'm referring to gross/net salary not gross/net contributions, sorry for the confusion…

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/82151724#Comment_82151724

I'm not entirely sure you are getting this.

There is no tax relief due on a salary sacrifice contribution as they are actually employer contributions.

And I'm not sure what £2,514 max really means. For a qualifying contribution you would always receive 25% of the net amount. You need to work out how much you can contribute gross before making the net contribution (with relief at source contributions).