Simple PAYE Tax question

[LotusOmega375D]

Apologies if you think ithis is a "bit thick"!

When taking Personal Pension Contributions into account for calculating your tax, do you deduct both the nett contributions paid and the tax relief, or just the tax relief alone (eg. 20% or 40% of nett contributions paid), before working out how much taxable pay you earn?

Thanks in advance for any assistance.

[Countdown]

LotusOmega375D said:

Apologies if you think ithis is a "bit thick"!

When taking Personal Pension Contributions into account for calculating your tax, do you deduct both the nett contributions paid and the tax relief, or just the tax relief alone (eg. 20% or 40% of nett contributions paid), before working out how much taxable pay you earn?

For calculating your "taxable income" you deduct pension contributions and your personal allowance from your gross pay. This leaves your taxable pay (which is taxed at different rates for different amounts).

For example - say you earn £40k gross, your personal allowance is £7k and you pay £5k into a pension scheme. You will pay tax on £28k

HTH

[mollymoo]

Countdown said:

For calculating your "taxable income" you deduct pension contributions and your personal allowance from your gross pay. This leaves your taxable pay (which is taxed at different rates for different amounts).

For example - say you earn £40k gross, your personal allowance is £7k and you pay £5k into a pension scheme. You will pay tax on £28k

It's "taxable pay", not "taxed pay". You're confusing "taxable pay" with the pay you actually pay tax on. Taxable pay is just salary minus pension contributions (in this case anyway, there are other things which can affect it).

Your tax-free allowance is used when calculating how much tax is due. In your example the 'first' 7k of income is still taxable, you just don't actually pay any tax on it. The taxable pay in your example would be £35k, whatever the tax code.

[Countdown]

mollymoo said:

Countdown said:

For calculating your "taxable income" you deduct pension contributions and your personal allowance from your gross pay. This leaves your taxable pay (which is taxed at different rates for different amounts).

For example - say you earn £40k gross, your personal allowance is £7k and you pay £5k into a pension scheme. You will pay tax on £28k

It's "taxable pay", not "taxed pay". You're confusing "taxable pay" with the pay you actually pay tax on. Taxable pay is just salary minus pension contributions (in this case anyway, there are other things which can affect it).

Your tax-free allowance is used when calculating how much tax is due. In your example the 'first' 7k of income is still taxable, you just don't actually pay any tax on it. The taxable pay in your example would be £35k, whatever the tax code.

Where have I mentioned "taxed pay"?

Also I'm not sure how your personal allowance element is ever "taxable"?

[mollymoo]

Countdown said:

Where have I mentioned "taxed pay"?

You didn't, but you seemed to be under the impression that "taxable pay" is the pay you actually pay tax on - "taxed pay", if you like. It isn't.

Countdown said:

Also I'm not sure how your personal allowance element is ever "taxable"?

It's HMRC who make the rules and define what they mean by "taxable pay", and they don't agree with you. Look at one of your payslips or a P60 and work it back.

Taxable pay is the pay which is taken into consideration when working out how much tax you owe. If you have some tax calculation software that's the number you put in (along with the tax code, tax basis and month/week). The figures you use inside the calculation - personal allowances, different tax bands - are just artefacts of the calculation.

Maybe it would be easier for you to understand if you think of your personal allowance as being taxed at 0% (except that doesn't quite work if you have a K tax code).

[Countdown]

I think I understand but I think we're just arguing semantics Nobody pays tax on their personal allowance so I'm not sure why it's classed as taxable.

Anyhoo back to the OP - you will only pay tax on the salary left after pension contributions and personal allowance have been deducted.

[Countdown]

I think I understand but I think we're just arguing semantics Nobody pays tax on their personal allowance so I'm not sure why it's classed as taxable.

Anyhoo back to the OP - you will only pay tax on the salary left after pension contributions and personal allowance have been deducted.

[Eric Mc]

Are you a Higher Rate tax payer.

Tax relief on pensions can be a bit of a nightmate as the way tax relief is obtained can be quite complicated.