Pension tax relief... Educate me PH
Discussion
To keep figures simple I'm making them up.
If I paid 50k of tax in the last tax year. Is it possible to refile my self assessment and take back the tax and pop it into my pension?
My accountant mentioned to me yesterday about looking at my last few tax returns. Even though I've been on PAYE, I got the impression money could be reclaimed from HMRC and invested in my pension and it not cost me a penny.
I didn't want to ask once I was confused and I'm waiting for the official email of what she was trying to explain to me.
I almost felt kind of stupid that I hadn't already done this.
To be cleared I'm talking about the tax my employer has deducted from my wages....
If I paid 50k of tax in the last tax year. Is it possible to refile my self assessment and take back the tax and pop it into my pension?
My accountant mentioned to me yesterday about looking at my last few tax returns. Even though I've been on PAYE, I got the impression money could be reclaimed from HMRC and invested in my pension and it not cost me a penny.
I didn't want to ask once I was confused and I'm waiting for the official email of what she was trying to explain to me.
I almost felt kind of stupid that I hadn't already done this.
To be cleared I'm talking about the tax my employer has deducted from my wages....
Not really no.
You/your employer can dump up to £40k per year into your pension pot, in reality it’s actually £120k over a 3 year rolling time period. The money your company puts in doesn’t attract tax relief, the money you put in does….important point is “relief”. Assuming you are a higher rate tax payer (40% bracket) then for a £1000 investment into your pension (by you) you will only pay in £600 of real money, Mr taxman funds the other £400.
You do actually have to have earned sufficient to gain the relief though. If you are earning well enough, and haven’t dumped in the £120k over 3 years then you can (bit simplistic) just make up the difference and benefit from the relief on the difference (ie reduce your tax bill massively this year).
Jim
You/your employer can dump up to £40k per year into your pension pot, in reality it’s actually £120k over a 3 year rolling time period. The money your company puts in doesn’t attract tax relief, the money you put in does….important point is “relief”. Assuming you are a higher rate tax payer (40% bracket) then for a £1000 investment into your pension (by you) you will only pay in £600 of real money, Mr taxman funds the other £400.
You do actually have to have earned sufficient to gain the relief though. If you are earning well enough, and haven’t dumped in the £120k over 3 years then you can (bit simplistic) just make up the difference and benefit from the relief on the difference (ie reduce your tax bill massively this year).
Jim
This is something I’ve been meaning to ask, as I wasn’t sure exactly what figures are used towards the £40k annual limit when some contributions are made into a company pension from payroll and others into a personal pension.
Again, figures are not real, but I’m using round numbers to make it easier.
£100k basic salary, with 7% employee and 7% employer contributions into a company pension. That’s £7k from each, but there’s 40% tax relief on top of the employee contribution so does that mean £9600 plus £7000 towards the £40k limit.
Then, for contributions into a personal pension, if that was £1000 a month you’ll get 20% tax relief so £14400 towards the £40k for a total of £31k?
Is this right?
Again, figures are not real, but I’m using round numbers to make it easier.
£100k basic salary, with 7% employee and 7% employer contributions into a company pension. That’s £7k from each, but there’s 40% tax relief on top of the employee contribution so does that mean £9600 plus £7000 towards the £40k limit.
Then, for contributions into a personal pension, if that was £1000 a month you’ll get 20% tax relief so £14400 towards the £40k for a total of £31k?
Is this right?
Alex Z said:
This is something I’ve been meaning to ask, as I wasn’t sure exactly what figures are used towards the £40k annual limit when some contributions are made into a company pension from payroll and others into a personal pension.
Again, figures are not real, but I’m using round numbers to make it easier.
£100k basic salary, with 7% employee and 7% employer contributions into a company pension. That’s £7k from each, but there’s 40% tax relief on top of the employee contribution so does that mean £9600 plus £7000 towards the £40k limit.
Then, for contributions into a personal pension, if that was £1000 a month you’ll get 20% tax relief so £14400 towards the £40k for a total of £31k?
Is this right?
You would need to check but your employee 7% contribution maybe from gross pay so no tax to reclaimAgain, figures are not real, but I’m using round numbers to make it easier.
£100k basic salary, with 7% employee and 7% employer contributions into a company pension. That’s £7k from each, but there’s 40% tax relief on top of the employee contribution so does that mean £9600 plus £7000 towards the £40k limit.
Then, for contributions into a personal pension, if that was £1000 a month you’ll get 20% tax relief so £14400 towards the £40k for a total of £31k?
Is this right?
Without looking carefully 50k tax may put you in the stupid 100-125k band where your marginal tax is 60%.
If you earn 125k, the top 25k is 60%, you only see £10k cash to your pocket. If you can afford to give that 10k back you could turn it into 25k in your pension, it’s a strong deal
To make if your earnings are around there
If you earn 125k, the top 25k is 60%, you only see £10k cash to your pocket. If you can afford to give that 10k back you could turn it into 25k in your pension, it’s a strong deal
To make if your earnings are around there
stuthe
said:
said: Without looking carefully 50k tax may put you in the stupid 100-125k band where your marginal tax is 60%.
If you earn 125k, the top 25k is 60%, you only see £10k cash to your pocket. If you can afford to give that 10k back you could turn it into 25k in your pension, it’s a strong deal
To make if your earnings are around there
I used arbitrary figures however I exceed the numbers you have posted by a substantial amount. To bring it below the £125k, I would need to commit more than the annual allowance. I will do next year also and the year after will be 100% on my own self made earnings so could be £5k could be whatever. If you earn 125k, the top 25k is 60%, you only see £10k cash to your pocket. If you can afford to give that 10k back you could turn it into 25k in your pension, it’s a strong deal
To make if your earnings are around there
I get paid annually in arrears, so my accountant is writing up some tax advise now. Although she completely lost me earlier this week and I couldnt work it out.
Another thing to check, i am in a similar position, is the "type" of pension you have. If its salary sacrifice a lot of this may be moot BUT, and just because you are on a significant wage doesnt mean it is. I am with a US start up type company, pays well but slow to make changes in the UK hence for my contributions the pension provider only applies the basic rate rebate as the pension isnt salary sacrifice.
This means i need to tell them what my contributions were during my SA and i get a cheque/repayment for the delta between basic and my marginal rate a few weeks later.
This means i need to tell them what my contributions were during my SA and i get a cheque/repayment for the delta between basic and my marginal rate a few weeks later.
Alex Z said:
This is something I’ve been meaning to ask, as I wasn’t sure exactly what figures are used towards the £40k annual limit when some contributions are made into a company pension from payroll and others into a personal pension.
Again, figures are not real, but I’m using round numbers to make it easier.
£100k basic salary, with 7% employee and 7% employer contributions into a company pension. That’s £7k from each, but there’s 40% tax relief on top of the employee contribution so does that mean £9600 plus £7000 towards the £40k limit.
Then, for contributions into a personal pension, if that was £1000 a month you’ll get 20% tax relief so £14400 towards the £40k for a total of £31k?
Is this right?
7% employee = £7k to your pension pot (Salary sacrifice means this will have cost you £4200 cash)Again, figures are not real, but I’m using round numbers to make it easier.
£100k basic salary, with 7% employee and 7% employer contributions into a company pension. That’s £7k from each, but there’s 40% tax relief on top of the employee contribution so does that mean £9600 plus £7000 towards the £40k limit.
Then, for contributions into a personal pension, if that was £1000 a month you’ll get 20% tax relief so £14400 towards the £40k for a total of £31k?
Is this right?
7% Company =£7k to your pension pot
£1k month (from your cash) = £12k + £2400 (20% basic rate tax sorted out by pension provider)
Submit self assessment = £2400 cash back
End result:
Pension pot = £14k
Personal pension = £14.4K
Total pension contributions = £28.4k
Cost to you:
£4.2k (pension pot)
£12k (personal pension)
-£2.4k (tax reclaim)
Total cost = £13.8k
Well invested Sir ;-)
Jim
Following on from the helpful advice above.
Does the tax relief on pensions change proportionately with the amount paid in? For example if someone earning £55k pays 40% on their salary over £50k and they pay £6k into their pension do they get 40% tax relief on the whole £6k or 40% on the £5k they'd be paying 40% tax on and then 20% relief on the £1k they'd be paying 20% on?
Does the tax relief on pensions change proportionately with the amount paid in? For example if someone earning £55k pays 40% on their salary over £50k and they pay £6k into their pension do they get 40% tax relief on the whole £6k or 40% on the £5k they'd be paying 40% tax on and then 20% relief on the £1k they'd be paying 20% on?
sebdangerfield said:
Following on from the helpful advice above.
Does the tax relief on pensions change proportionately with the amount paid in? For example if someone earning £55k pays 40% on their salary over £50k and they pay £6k into their pension do they get 40% tax relief on the whole £6k or 40% on the £5k they'd be paying 40% tax on and then 20% relief on the £1k they'd be paying 20% on?
The second oneDoes the tax relief on pensions change proportionately with the amount paid in? For example if someone earning £55k pays 40% on their salary over £50k and they pay £6k into their pension do they get 40% tax relief on the whole £6k or 40% on the £5k they'd be paying 40% tax on and then 20% relief on the £1k they'd be paying 20% on?
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