Pension 40% Tax Relief Question PLEASE

simonleblank

My current salary is £41,500 pa, with a tax code of 177. I currently pay about £3,000 into a pension hence get Tax relief at 40% through the company I work for. This means that I do not pay 40% tax on my savings as well.

I understand that as of April 2008, Tax rules are changing, whereby the 40% tax band will be set at £40,000. Will I get 40% tax relief on payments for the 2008/9 tax year?

I have asked my company if they would consider Salary Sacrifice, to help cover some of the shortfall.

Have I got this right?

jem16

You will still get 40% overall.

Just now 22% is added to your pension and 18% is claimed via the tax return.

After April 20% is added to your pension and 20% will be claimed back.

So it does affect the pension unless you pay all of that 18/20% back into your pension.

simonleblank

I still do not understand, if the 40% tax band is set at £40,000, and after my tax code is taken off (£41,500 - 1770) = £39,730, how do I get 40% tax relief on pension payments?

lisyloo

I currently pay about £3,000 into a pension hence get Tax relief at 40% through the company I work for.

Hi Simon,

I'm not sure how this works for you.
Normally pension money is deducted from net salary, is this correct?
If so then it's ikely that your company scheme only claims back 22% for everyone and it's up to you to claim back the rest via a tax return.

This means that I do not pay 40% tax on my savings as well.

Well if you ARE a 40% tax payer and getting the relief on your pension then you SHOULD be paying 40% on your savings via your tax return.

Perhaps you can clarify whether your pensions is dedcuted from your salary NET or GROSS i.e. is it take before or after tax.

jem16

Do you pay the pension contributions from gross salary or net salary?

If it's gross it's all academic as pension is deducted before tax.

simonleblank

I pay my pension gross, through my salary hence I do not have to claim back the tax

CLAPTON

first of all, the 40% tax band doesNOT in general start at 40,000 after april 6th... (its true if you have the proposed standard personal allowance of 5435 but you dont; you currently only have 1770)

So at the moment you start paying 40% tax at taxable income of 1770 plus 34600 = 36,370

your taxable income is 41,500 - 3000 (pension) = 38,500
so your tax should be
first 1770 is tax free
next 2230 at 10%
next 32370 at 22%
then 2130 at 40%

if you have saving interest which isn't accounted for by your low personal allowance then this needs to be declared to the HMRC

Without knowing why your tax code is 177 its difficult to work out what will happen next year.
The budget may well change the tax levels but at the moment we know the personal tax allowance will be 5435
and then its 20% for the next 32,370....

CLAPTON

PS

I suppose we could assume your benefits in kind don't change i.e they are 5225-1770= 3455

so post april it would look like this

taxable pay = 41500 - 3000 (pension) =38,500
tax code = (5435-3455= 1980) i.e. 198L

so
1980 tax free
34600 at 20%
so leaving 1920 to be taxed at 40%

plus any saving interest would then be taxed at 40% (20% more to pay)

simonleblank

If I pay the £1920 into my Pension, then I should not pay 40% tax on either my earnings or Pension, is this correct?

sebastianj

I thought you could only contribute a certain percentage of your income towards the pension. Otherwise you could pay £3500 PM into your pension and claim Income support (Just kidding) but the message is there somewhere. Just ask your company how much maximum you can contribute and they will tell you.
rgd
seb

lisyloo

I thought you could only contribute a certain percentage of your income towards the pension.

There used to be limits depending on age but I think that all disappeared with A-day, perhaps someone else can confirm.

For most people there are practical limits, so it doesn't make a huge diffeernce.