Pension contributions from gov't
Discussion
A lot of correct answers (from those who know) mixed up with other answers (from those who think they know!) here.
OP - I take it you are employed (rather than self-employed) given what you have said.
As a higher rate (40%) taxpayer you can place any or all of your earnings that are taxed at the higher rate into a pension and half of the tax you would have otherwise paid (20%) will be claimed back by your pension provider with the other half (again 20%, so totalling 40%) claimed back by you through your tax return.
So you are putting aside £600 of net income (£1,000 of gross income) to get £1,000 in your pension and £200 in your pocket.
If you remain in the higher rate tax band throughout retirement then for each £1,000 you put into your pension (ignoring the tax free growth) at a net cost to you of £600 you can withdraw £700 after tax (factoring in your tax free cash element and 40% tax on the balance).
So you have a 'free' £100 per £1,000 invested, or to put it another way you have reduced your effective tax rate by 25% (40% falls to 30%).
The reality, however, is that most 40% taxpayers become basic rate taxpayers in retirement. This means for every £600 of net income you place into a pension you can withdraw £850 of net pension income.
So this gives you a £250 'free' profit (or 41.66% net return).
I have assumed investment returns are equal to costs and inflation.
So
OP - I take it you are employed (rather than self-employed) given what you have said.
As a higher rate (40%) taxpayer you can place any or all of your earnings that are taxed at the higher rate into a pension and half of the tax you would have otherwise paid (20%) will be claimed back by your pension provider with the other half (again 20%, so totalling 40%) claimed back by you through your tax return.
So you are putting aside £600 of net income (£1,000 of gross income) to get £1,000 in your pension and £200 in your pocket.
If you remain in the higher rate tax band throughout retirement then for each £1,000 you put into your pension (ignoring the tax free growth) at a net cost to you of £600 you can withdraw £700 after tax (factoring in your tax free cash element and 40% tax on the balance).
So you have a 'free' £100 per £1,000 invested, or to put it another way you have reduced your effective tax rate by 25% (40% falls to 30%).
The reality, however, is that most 40% taxpayers become basic rate taxpayers in retirement. This means for every £600 of net income you place into a pension you can withdraw £850 of net pension income.
So this gives you a £250 'free' profit (or 41.66% net return).
I have assumed investment returns are equal to costs and inflation.
So
JulianPH said:
So you are putting aside £600 of net income (£1,000 of gross income) to get £1,000 in your pension and £200 in your pocket.
Isn't the extra "£200 in your pocket" a bit of double-counting, or have I misunderstood you?If the OP pays the contributions himself (i.e. not the OP's employer paying it by salary sacrifice) wouldn't it be:
OP pays £800
pension provider claims back the basic rate tax so making a total £1,000 contribution
OP then claims a further £200 back via his tax return
Zigster said:
JulianPH said:
So you are putting aside £600 of net income (£1,000 of gross income) to get £1,000 in your pension and £200 in your pocket.
Isn't the extra "£200 in your pocket" a bit of double-counting, or have I misunderstood you?If the OP pays the contributions himself (i.e. not the OP's employer paying it by salary sacrifice) wouldn't it be:
OP pays £800
pension provider claims back the basic rate tax so making a total £1,000 contribution
OP then claims a further £200 back via his tax return
Of course all of this assumes pension rules stay the same for 30 years or however long until you draw it, which they almost certainly wont. If for example "they" have decided you need to be 70 to touch it, and marginal tax rates are at 50% by then, it may not make so much sense after all. None of us have a crystal ball unfortunately.
I always find it sensible to pay a good amount into pension, but not at the complete expense of any other investments. I for example maintain an ISA too, you may choose other investments.
I always find it sensible to pay a good amount into pension, but not at the complete expense of any other investments. I for example maintain an ISA too, you may choose other investments.
rsbmw said:
Of course all of this assumes pension rules stay the same for 30 years or however long until you draw it, which they almost certainly wont. If for example "they" have decided you need to be 70 to touch it, and marginal tax rates are at 50% by then, it may not make so much sense after all. None of us have a crystal ball unfortunately.
I always find it sensible to pay a good amount into pension, but not at the complete expense of any other investments. I for example maintain an ISA too, you may choose other investments.
+1I always find it sensible to pay a good amount into pension, but not at the complete expense of any other investments. I for example maintain an ISA too, you may choose other investments.
Zigster said:
JulianPH said:
So you are putting aside £600 of net income (£1,000 of gross income) to get £1,000 in your pension and £200 in your pocket.
Isn't the extra "£200 in your pocket" a bit of double-counting, or have I misunderstood you?If the OP pays the contributions himself (i.e. not the OP's employer paying it by salary sacrifice) wouldn't it be:
OP pays £800
pension provider claims back the basic rate tax so making a total £1,000 contribution
OP then claims a further £200 back via his tax return
For £600 of net income you get £1,000 in your pension and £200 in your pocket via your tax return.
The way this is calculated is exactly as you describe.
Jockman said:
JulianPH said:
Not double counting, but perhaps badly expressed!
For £600 of net income you get £1,000 in your pension and £200 in your pocket via your tax return.
The way this is calculated is exactly as you describe.
You’ve still lost me, mate. I appreciate that’s not difficult. For £600 of net income you get £1,000 in your pension and £200 in your pocket via your tax return.
The way this is calculated is exactly as you describe.
For £800 of net income you get £1,000 in your pension and £200 in your pocket via your tax return.
Jockman said:
JulianPH said:
Not double counting, but perhaps badly expressed!
For £600 of net income you get £1,000 in your pension and £200 in your pocket via your tax return.
The way this is calculated is exactly as you describe.
You’ve still lost me, mate. I appreciate that’s not difficult. For £600 of net income you get £1,000 in your pension and £200 in your pocket via your tax return.
The way this is calculated is exactly as you describe.
What I meant was you are exchanging £600 of net income (had you drawn it) for £1,000 in your pension and £200 in your pocket.
This is achieved by investing £800 into your pension and getting £200 of basic rate tax relief (so £1,000 in your pension) and then reclaiming the higher rate tax relief (another £200) through your tax return.
JulianPH said:
Jockman said:
JulianPH said:
Not double counting, but perhaps badly expressed!
For £600 of net income you get £1,000 in your pension and £200 in your pocket via your tax return.
The way this is calculated is exactly as you describe.
You’ve still lost me, mate. I appreciate that’s not difficult. For £600 of net income you get £1,000 in your pension and £200 in your pocket via your tax return.
The way this is calculated is exactly as you describe.
What I meant was you are exchanging £600 of net income (had you drawn it) for £1,000 in your pension and £200 in your pocket.
This is achieved by investing £800 into your pension and getting £200 of basic rate tax relief (so £1,000 in your pension) and then reclaiming the higher rate tax relief (another £200) through your tax return.
Zigster said:
Jockman said:
JulianPH said:
Not double counting, but perhaps badly expressed!
For £600 of net income you get £1,000 in your pension and £200 in your pocket via your tax return.
The way this is calculated is exactly as you describe.
You’ve still lost me, mate. I appreciate that’s not difficult. For £600 of net income you get £1,000 in your pension and £200 in your pocket via your tax return.
The way this is calculated is exactly as you describe.
For £800 of net income you get £1,000 in your pension and £200 in your pocket via your tax return.
Or £600 of net income for £1,000 in your pension if you're in a salary sacrifice scheme.
CaptainSlow said:
Zigster said:
Jockman said:
JulianPH said:
Not double counting, but perhaps badly expressed!
For £600 of net income you get £1,000 in your pension and £200 in your pocket via your tax return.
The way this is calculated is exactly as you describe.
You’ve still lost me, mate. I appreciate that’s not difficult. For £600 of net income you get £1,000 in your pension and £200 in your pocket via your tax return.
The way this is calculated is exactly as you describe.
For £800 of net income you get £1,000 in your pension and £200 in your pocket via your tax return.
Or £600 of net income for £1,000 in your pension if you're in a salary sacrifice scheme.
Accepting that if you don’t have a very big fund, you may well draw your pension at the lower rate.
REALIST123 said:
CaptainSlow said:
Zigster said:
Jockman said:
JulianPH said:
Not double counting, but perhaps badly expressed!
For £600 of net income you get £1,000 in your pension and £200 in your pocket via your tax return.
The way this is calculated is exactly as you describe.
You’ve still lost me, mate. I appreciate that’s not difficult. For £600 of net income you get £1,000 in your pension and £200 in your pocket via your tax return.
The way this is calculated is exactly as you describe.
For £800 of net income you get £1,000 in your pension and £200 in your pocket via your tax return.
Or £600 of net income for £1,000 in your pension if you're in a salary sacrifice scheme.
Accepting that if you don’t have a very big fund, you may well draw your pension at the lower rate.
REALIST123 said:
And you’ll pay the 40% on the £1000 when you draw it as pension, less the tax free element as I said what seems a lifetime ago.
Accepting that if you don’t have a very big fund, you may well draw your pension at the lower rate.
Even a million pound fund can be drawn at basic rate. Accepting that if you don’t have a very big fund, you may well draw your pension at the lower rate.
CaptainSlow said:
JulianPH said:
Jockman said:
JulianPH said:
Not double counting, but perhaps badly expressed!
For £600 of net income you get £1,000 in your pension and £200 in your pocket via your tax return.
The way this is calculated is exactly as you describe.
You’ve still lost me, mate. I appreciate that’s not difficult. For £600 of net income you get £1,000 in your pension and £200 in your pocket via your tax return.
The way this is calculated is exactly as you describe.
What I meant was you are exchanging £600 of net income (had you drawn it) for £1,000 in your pension and £200 in your pocket.
This is achieved by investing £800 into your pension and getting £200 of basic rate tax relief (so £1,000 in your pension) and then reclaiming the higher rate tax relief (another £200) through your tax return.
If you took the money as income you would be left with £600 after 40% income tax. If you put it into a pension you have exchanged this £600 for £1,000 in your pension and £200 in you pocket via your tax return...
Please tell me where I am getting it wrong as I must be going mad (2 hours until next Lemsip!!!).
JulianPH said:
You might very well be right as I can't for the life of me see how what I just said was in any way incorrect!
If you took the money as income you would be left with £600 after 40% income tax. If you put it into a pension you have exchanged this £600 for £1,000 in your pension and £200 in you pocket via your tax return...
Please tell me where I am getting it wrong as I must be going mad (2 hours until next Lemsip!!!).
I thought that it was £800 in the pension and £200 in the tax return?If you took the money as income you would be left with £600 after 40% income tax. If you put it into a pension you have exchanged this £600 for £1,000 in your pension and £200 in you pocket via your tax return...
Please tell me where I am getting it wrong as I must be going mad (2 hours until next Lemsip!!!).
Otherwise you have a negative effective tax rate.
rsbmw said:
Of course all of this assumes pension rules stay the same for 30 years or however long until you draw it, which they almost certainly wont. If for example "they" have decided you need to be 70 to touch it, and marginal tax rates are at 50% by then, it may not make so much sense after all. None of us have a crystal ball unfortunately.
I always find it sensible to pay a good amount into pension, but not at the complete expense of any other investments. I for example maintain an ISA too, you may choose other investments.
Isn't there also the option to do a draw-down at 55 of 25% of the pot ?I always find it sensible to pay a good amount into pension, but not at the complete expense of any other investments. I for example maintain an ISA too, you may choose other investments.
EDIT, so if you're a few years away from this point, it'd be better to pay into a pension than overpay a mortgage.
Edited by Chris Type R on Tuesday 16th October 14:38
Gassing Station | Finance | Top of Page | What's New | My Stuff