Pension contributions from gov't

[Z064life]

Hi,

I am a high rate tax power (earning £60k). I have heard that if I invest in my (company) pension, the government automatically contributes 40%. Is this true? So if I invested £100, the government invests £40.

Is investing more into my pension from my monthly wage a good way to be more tax efficient?

[Green1man]

Basically any money you put into a pension fund (up to £40k/year I think) is tax free, so if you would have payed 40% tax on it as a higher rate payer then yes you will gain 40%. So it’s certainly worth considering putting as much as your wage over the higher rate threshold into you pension as you can afford.

[CaptainSlow]

Z064life said:

Hi,

I am a high rate tax power (earning £60k). I have heard that if I invest in my (company) pension, the government automatically contributes 40%. Is this true? So if I invested £100, the government invests £40.

Is investing more into my pension from my monthly wage a good way to be more tax efficient?

You put in £60...they put in £40.

[Z064life]

Ok so as I thought. May as well do this actively as it is free money.

One more question - I worked for a company for 12 months from 2010-2011 (which was brought by another company, which in turn was brought by another company). I had a company pension with this company but think it is now time to get that pension and (if I can?) merge it with current pension, or get a refund - whichever.

What's the best way to sort this out? I've emailed said company.

[anonymous-user]

Z064life said:

Ok so as I thought. May as well do this actively as it is free money.

One more question - I worked for a company for 12 months from 2010-2011 (which was brought by another company, which in turn was brought by another company). I had a company pension with this company but think it is now time to get that pension and (if I can?) merge it with current pension, or get a refund - whichever.

What's the best way to sort this out? I've emailed said company.

It’s not free money at all.

If you put some of your earnings into a pension you can defer the income tax due on it until you eventually draw it back as a pension, when it will be taxed in the normal way, albeit after a 25% tax free lump sum.

As for moving your other contributions it’s probably not worth it. The costs of moving may well be more than its worth

And it’s bought, not brought.

[PurpleMoonlight]

CaptainSlow said:

You put in £60...they put in £40.

Sort of.

You put in £80.

They put in £20.

You reclaim £20 via your tax return.

[GT03ROB]

PurpleMoonlight said:

CaptainSlow said:

You put in £60...they put in £40.

Sort of.

You put in £80.

They put in £20.

You reclaim £20 via your tax return.

Guess it depends how the company pension works. Our lot just take it out of our pay cheque gross. There is no reclaiming involved.

[PurpleMoonlight]

GT03ROB said:

Guess it depends how the company pension works. Our lot just take it out of our pay cheque gross. There is no reclaiming involved.

True.

The way the OP describes it suggests his employers pension arrangement operates relief at source but they may not.

[CaptainSlow]

PurpleMoonlight said:

CaptainSlow said:

You put in £60...they put in £40.

Sort of.

You put in £80.

They put in £20.

You reclaim £20 via your tax return.

So it ends up as I said. I wasn't going through the fine details as it appears the OP doesn't have even a basic understanding.

[anonymous-user]

CaptainSlow said:

PurpleMoonlight said:

CaptainSlow said:

You put in £60...they put in £40.

Sort of.

You put in £80.

They put in £20.

You reclaim £20 via your tax return.

So it ends up as I said. I wasn't going through the fine details as it appears the OP doesn't have even a basic understanding.

Perhaps he’s not the only one.

There is no ‘they’. The contributions all come from the employee. All he’s doing is deferring the tax.

He puts in £100.

[anonymous-user]

REALIST123 said:

The contributions all come from the employee. All he’s doing is deferring the tax.

The position has been correctly explained by a number of people (above), it's not just tax deferral.

• Individual's "cost" is £60 but £100 gets invested. Free money.
• Everything, including the free money, grosses up tax free for years/decades. More free money.
• At the end, 25% comes out with no tax at all. Free money.
• Individual may have had tax relief at 40% on contributions and only pay tax at 20% on the part of pension that gets taxed. More free money.

Did I remember to mention there's free money available...

[CaptainSlow]

REALIST123 said:

He puts in £100.

Wrong.

[ATG]

CaptainSlow said:

REALIST123 said:

He puts in £100.

Wrong.

You get paid £100. You can either pay income tax on that sum and pocket the rest, or you can stick the whole lot into your pension.

It's "free money" only in the sense that it's a way of reducing your income tax. The government isn't giving you any cash. They're letting you pay less income tax. That's a rather odd definition of "free".

None of which detracts from the fact that avoiding 40% income tax makes pension contributions a great way to save for an awful lot of people.

[ril7979]

I think this needs explaining a bit more (I may be wrong)

I'm self employed, if i put £100 into my pension I pay in £100, the Gov't doesn't top it up they just dont tax me on it.

So I don't get any extra paid in???

[GT03ROB]

ril7979 said:

I think this needs explaining a bit more (I may be wrong)

I'm self employed, if i put £100 into my pension I pay in £100, the Gov't doesn't top it up they just dont tax me on it.

So I don't get any extra paid in???

The government gives you nothing you wouldn't have given them!

[longlurker]

So if you wanted to max out your annual contribution of £40k, you'd pay £33,333 into the pension yourself, the pension provider would claim an extra £6,666 from the govt and pay this into the account and you'd then claim back £6,666 in your next tax return?

[CaptainSlow]

longlurker said:

So if you wanted to max out your annual contribution of £40k, you'd pay £33,333 into the pension yourself, the pension provider would claim an extra £6,666 from the govt and pay this into the account and you'd then claim back £6,666 in your next tax return?

No, you'd pay £32k...pension claim £8k...you then claim back £8k via tax return (assuming all in higher rate).


eta....assuming the £32k is paid from already taxed income.

[longlurker]

Gotcha - the principle makes sense.

[Jockman]

Or your Company pays the contribution for you and receives 19% Corp tax relief on it.

[oop north]

Jockman said:

Or your Company pays the contribution for you and receives 19% Corp tax relief on it.

And you avoid dividend tax. For a higher rate taxpayer the tax relief thereby comes in at around 46% of the underlying profit (that’ll drop to around 44% when corporation tax drops to 17%)