Pension Tax relief on all income?

MoneyTown

I know you can get relief on earned income but was wondering if it is possible to put all types of income into a Pension and get tax relief?

For instance would it be possible to avoid paying income tax on savings income or rental income, by putting it into a pension?

dunstonh

You can put 100% of your earned income into a pension and get tax relief or £3600 whichever is the higher.

rental income doesnt count as earned income

Mark_2.0

dunstonh
Am I right in assuming we can only claim tax relief on 'taxible' earned income (and at the rate paid)?

MoneyTown

As a rough example, say someone had income as follows:

£45,000 earned income
£5,000 savings interest
£5,000 rental income

and he was prepared to put as much income into a Pension to avoid higher rate income tax. How would you calculate how much to put in ?

thanks.

bigbloke45

DH is quite right, you can only get tax relief on earned income or 3,600 whichever is greater.

However, tax relief is granted in full. this means that, if your unearned icome plus your erned income combined makes you a higher rate taxpayer, then you will be able to claim 40% against your pension contributions (as long as you don't "straddle" basic and higher rates).

Effectively you are using your unearned income to get extra tax relief.

I hope this is clear.

Mark_2.0

So, if I am earning £ 50k and pay the lot into my pension, I can claim (roughly) 40% on £10k, 20% on £33K and nothing on the last £ 7K?

MoneyTown

I think I'm almost there with this though the 'straddling' bit you mention bigbloke45 escapes me.

Would some kind person be able to show with the figures I posted above please? thanks!

dunstonh

In that example, the maximum pension contribution to get tax relief on it would be £45,000

Non rate taxpayers can still get 20% tax relief. Higher rate relief only applies to the amount in the higher rate band.


edit: example from post #4

whu

if you pay into a personal pension scheme through work you automatically get basic tax relief and then you have to claim the additional 20% (from this tax year) directly but your interest will be offset against that as you have to pay an additional 20% on the interest earned (all assuming you are a higher rate tax payer)

MoneyTown

In the example would 40% tax always be due on the savings and rental income or could this be effectively removed by contributing approximately £15000 into the pension ?

CLAPTON

MoneyTown wrote: »

As a rough example, say someone had income as follows:

£45,000 earned income
£5,000 savings interest
£5,000 rental income

and he was prepared to put as much income into a Pension to avoid higher rate income tax. How would you calculate how much to put in ?

thanks.

I believe it works like this
assuming 45000 is gross pay
and 5,000 is gross interest for self assessment purposes (i.e. grossed up but excluding ISA )
and 5,000 is net rental income for self assesssment purpose then

gross income is 55,000
less 6035 (tax free)
less 34,800 (taxed at 20%)

gives 14,165 at 40%

so he could contribute 14,165 to avoid 40% tax.
assuming he was paying into a personal pension scheme then he would actually contribute 80% of this i.e. 11,332 and get tax relief back via self assessment