income from drawdown and tax bands
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crimsoid
Posts: 13 Forumite
I am over 60 and currently in employment with a total income below the threshold for 40% income tax.
I am contributing to my employers DC pension scheme.
I also have a private pension pot from previous employers that I am planning to move into drawdown.
If I take £3,000 per annum in drawdown then that would put me into the 40% band for income tax.
Would I then be allowed tax relief at the higher rate on all my pension contributions, or is that too much of a good thing?
I am contributing to my employers DC pension scheme.
I also have a private pension pot from previous employers that I am planning to move into drawdown.
If I take £3,000 per annum in drawdown then that would put me into the 40% band for income tax.
Would I then be allowed tax relief at the higher rate on all my pension contributions, or is that too much of a good thing?
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Comments
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Check the Money Purchase Annual Allowance (MPAA) rules. If you take ANY taxable income from a DC scheme you are limited to what you can contribute going forwards, I think it is £4k per year instead of the normal £40k.
https://www.moneyadviceservice.org.uk/en/articles/change-to-mpaa
Could have a significant impact on your planning so be careful before you start DC drawdown.0 -
To answer your question.....you only get 40% tax relief up to the amount you paid 40% tax on.0
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Also the drawdown money you might receive is only classed as earned income for tax purposes, not pension tax relief. You can't get tax relief on drawdown, only "real" earned income.0
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Thanks for the prompt replies. I put this to some relatives the other day and we got mightily confused!
Let's refer to the deferred pension as pot X and my current employer's DC pension scheme as pot Y.
I haven't contributed to pot X for several years, but I am contributing to pot Y every month.
The plan is to put pot X into drawdown and receive enough to put me into the 40% tax band.
Are my contributions to pot Y - which are deducted directly from my salary - allowed tax relief at 40% ?0 -
It depends what your total taxable earnings are. If you earn £1 above the 40% limit, then you will only get tax relief at 40% on £1 of contributions, the rest will be at 20%.0
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As stated pension relief is only allowable on earnings.
Pension drawdown is not earnings so increasing your income with drawdown will not affect your pension relief.
If your earnings are taxable at basic rate then pension relief will be due at basic rate only.0 -
sheramber
From a practical perspective the pension contribution would surely get higher rate tax relief, just in a round about manner.
Say the op earns £50,000 but pays 10% into his employers DC scheme so his taxable pay is £45,000.
Add in the £3,000 pension income and a little 40% tax is paid on the pension income. Without the pension contribution 40% tax is due on the whole of the pension income.0 -
But his earnings are not £50000. He has said they are below the 40% rate band.
So he only gets 20% relief on his earnings.
It is only when he adds in the drawdown that he becomes liable to 40%
It is similar to if he had savings income instead of pension income. Neither are relevant earnings0 -
The OP's drawdown income is not relevant income for pension contribution purposes.
However, if he takes sufficient drawdown income, he will owe a certain amount of tax at 40%.
He can regard his drawdown income as a replacement for part of his current earned income and therefore be in a position to increase his contributions to his workplace pension.
In this way he can avoid 40% tax on his total income?0 -
But his earnings are not £50000. He has said they are below the 40% rate band.
So he only gets 20% relief on his earnings.
It is only when he adds in the drawdown that he becomes liable to 40%
It is similar to if he had savings income instead of pension income. Neither are relevant earnings
His "salary" may be £50,000 and his defined contribution pension payments are likely to be deducted from gross salary rather than being relief at source so normally they would result in 40% relief - without the pension contribution tax is due on pay of £50,000 but with the pension contribution tax is only due on £45,000 so the majority of the pension contributions have saved the op 40% tax.
A knock on consequence of this is that instead of the pension income all being taxed at 40% (had the taxable pay from employment been £50,000) some of it will be taxed at 20% because the defined pension contribution has reduced the taxable pay to £45,000
Example with no pension contribution
Employment £50,000
less Personal Allowance £11,850
Pay to be taxed £38,150
£34,500 x 20% = £6900
£3,650 x 40% = £1460
Pension income
£3,000 x 40% = £1200
Total tax payable £9,560
Example with 10% pension contribution (not relief at source)
Salary £50,000
less pension contribution £5,000
Taxable salary £45,000
less Personal Allowance £11,850
Pay to be taxed £33,150
£33,150 x 20% = £6630
Pension income
£1,350 x 20% = £270
£1,650 x 40% = £660
Total tax payable £7,5600
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