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Is this a scam?
lafrowda
Posts: 3 Newbie
Am I missing something? As far as I can tell, the tax relief I get is reduced substantially by the tax I have to pay on my contribution in PAYE.
PAYE
Employee Contribution 79.52
Tax on contribution 20% (14.00)
PENSION
Employee Contribution 79.52
Tax Relief 20% 19.58
Result only 7% 85.10
What have I missed?
Lafrowda
PAYE
Employee Contribution 79.52
Tax on contribution 20% (14.00)
PENSION
Employee Contribution 79.52
Tax Relief 20% 19.58
Result only 7% 85.10
What have I missed?
Lafrowda
0
Comments
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Simpler example:
If you contribute £80 out of net pay (having had 20%/£20 deducted for income tax) then you receive relief of 25% of that £80 (i.e. £20) to give you that tax relief.
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You've contributed £79.52. 25% of that is (almost) the £19.58 figure (i.e. you don't use 20% on that net figure to get the gross.) Incidentally, are you sure that figure isn't £19.88?
It's not clear where those 7% or 85.10 figures are coming from.Conjugating the verb 'to be":
-o I am humble -o You are attention seeking -o She is Nadine Dorries0 -
Thank you for your reply Paul - Yes, my numbers are sketchy, but I thought for every £1 contributed the government paid-in .20 pence i.e. 20% ? In your simple example
PAYE 20% of £80 is £16
RELIEF 25% of 80 is £20 (A difference of £4)
£4 is 5% of £80
Not 20%0 -
This is how the numbers work:
Pay = £100 gross
Tax deducted = £20
Net pay = £80
Net Pension contribution = £80
Tax relief =£20
Total pension contribution =£100
Yes, you get 20% tax relief on your pension contributions, but this refers to the 20% tax that was deducted from your pay.
You are correct though, in that you do actually receive a 25% addition to your net pension contribution.I am an Independent Financial Adviser. Any comments I make here are intended for information / discussion only. Nothing I post here should be construed as advice. If you are looking for individual financial advice, please contact a local Independent Financial Adviser.0 -
But isn't it obvious that this tax relief (our incentive so to speak) is reduced by the tax we have to pay on our contributions in our pay packets?0
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Thank you for your reply Paul - Yes, my numbers are sketchy, but I thought for every £1 contributed the government paid-in .20 pence i.e. 20% ? In your simple example
No - you've paid tax of 20% to get to that £1, so you need 25% of that £1 to bring you back to the original amount.
Gross £1.25. Tax of 20% is 25p, dropping it to £1.
Put £1 in your pension, government refunds 25% of that (25p) bringing it back to £1.25.PAYE 20% of £80 is £16
RELIEF 25% of 80 is £20 (A difference of £4)
You're treating that £80 as gross in the first line and net in the second:
- Gross of £80 gets taxed 20%(£16) to bring it to £64. 25% of £64 is £16.
- Net of £80 was £100 which was taxed 20%(£20) to bring it to £80. 25% relief of £80 is £20.
There's no loss going on here - you're simply confusing net pay which gets 25% relief with gross pay which gets taxed at 20%.Conjugating the verb 'to be":
-o I am humble -o You are attention seeking -o She is Nadine Dorries0
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