Pension contributions from gov't

[CaptainSlow]

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!!!).

If you've given up £600 of net to get £1,000 in the pension then you are unable to claim back anything on your tax return.


You only need to make a claim via the tax return if you're not getting the full tax relief at source ...or you're paying into a pension with previously taxed income.

[JulianPH]

NickCQ said:

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?
Otherwise you have a negative effective tax rate.

It is a 40% taxpayer so there are two sets of 20% tax involved (the basic rate and the additional higher rate).

If the OP take £1,000 of gross income as part of normal drawings they would have £600 after the 40% tax.

Or, the OP can make £800 net pension contribution which will gross up to £1,000 after the reclaim of £200 (20%) basic rate tax and reclaim a further £200 in higher rate tax relief via their tax code (this £200 being the difference between the 20% basic rate on the gross £1,000 contribution and the 20% balance of higher rate tax on the £1,000 gross contribution).

So they have exchanged £600 net earnings for £1,000 in their pension and £200 in their pocket. There is no negative tax rate, the 40% tax rate is returned via two different methods (basic rate relief at source within the pension and the higher rate element through the tax return).

So the £1,000 gross contribution has cost £600.

If I am phrasing this badly please let me know as I feel I am just repeating myself!!!

[CaptainSlow]

JulianPH said:

So they have exchanged £600 net earnings for £1,000 in their pension and £200 in their pocket. There is no negative tax rate, the 40% tax rate is returned via two different methods (basic rate relief at source within the pension and the higher rate element through the tax return).

Nope...it would be...

So they have exchanged £600 net earnings and an extra £200 for £1,000 in their pension and £200 in their pocket. There is no negative tax rate, the 40% tax rate is returned via two different methods (basic rate relief at source within the pension and the higher rate element through the tax return).

[JulianPH]

CaptainSlow said:

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!!!).

If you've given up £600 of net to get £1,000 in the pension then you are unable to claim back anything on your tax return.


You only need to make a claim via the tax return if you're not getting the full tax relief at source ...or you're paying into a pension with previously taxed income.

Not correct.

If you have given up £600 of net income (as a higher rate taxpayer) then you have given up £1,000 of gross income.

The way this is done with personal contributions (with the exception of salary sacrifice) is via a (net) contribution of £800 which is grossed up to £1,000 and then a reclaim on your tax assessment of the balance (a further £200).

So you are exchanging £600 of net income for £1,000 in your pension and £200 in your pocket.

No one gets full tax relief at source for personal contributions. You only receive basic rate tax relief within your pension. Any higher rate(s) are paid to you directly through your tax assessment form.

[mikeiow]

I used to think I understood this stuff!!

[CaptainSlow]

JulianPH said:

CaptainSlow said:

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!!!).

If you've given up £600 of net to get £1,000 in the pension then you are unable to claim back anything on your tax return.


You only need to make a claim via the tax return if you're not getting the full tax relief at source ...or you're paying into a pension with previously taxed income.

Not correct.

If you have given up £600 of net income (as a higher rate taxpayer) then you have given up £1,000 of gross income.

The way this is done with personal contributions (with the exception of salary sacrifice) is via a (net) contribution of £800 which is grossed up to £1,000 and then a reclaim on your tax assessment of the balance (a further £200).

So you are exchanging £600 of net income for £1,000 in your pension and £200 in your pocket.

No one gets full tax relief at source for personal contributions. You only receive basic rate tax relief within your pension. Any higher rate(s) are paid to you directly through your tax assessment form.

You get full relief at source if you're involved in a salary sacrifice scheme...which many people are now.

For your example it needs to read..

So you are exchanging £800 of net income for £1,000 in your pension and £200 in your pocket.

[Chris Type R]

mikeiow said:

I used to think I understood this stuff!!

Remember the ads from a few years ago - "Tax Doesn’t Have to Be Taxing"

[JulianPH]

CaptainSlow said:

You get full relief at source if you're involved in a salary sacrifice scheme...which many people are now.

For your example it needs to read..

So you are exchanging £800 of net income for £1,000 in your pension and £200 in your pocket.

Which is exactly what I said!!!

£800 of net income grossed up to £1,000 plus £200 of net tax return (outside of the pension) is, which ever way you count it, a £600 cost.

The vast majority of people are not involved in salary sacrifice though, this is small (tiny) minority. More employees should consider it though.

With Salary sacrifice there is no tax relief at source at all (as there is no tax relief whatsoever on gross contributions), so this is also wrong.

In a nutshell, it does indeed equate to a higher rate taxpayer placing £600 to make a £1,000 pension contribution - and they will get this by putting in £800 (and getting basic rate tax relief of £200 to add to this) and reclaiming back another £200 via their tax return.

So, they have exchanged £600 today for £1,000 in their pension today

[CaptainSlow]

At risk of prolonging the misery, you actually said this:

JulianPH said:

So you are exchanging £600 of net income for £1,000 in your pension and £200 in your pocket.

Which is wrong.

JulianPH said:

With Salary sacrifice there is no tax relief at source at all (as there is no tax relief whatsoever on gross contributions), so this is also wrong.

Of course there are, which is why they're paid in gross.

JulianPH said:

So, they have exchanged £600 today for £1,000 in their pension today

At last! (not sure where your magic £200 has gone though)

[JulianPH]

I'm not sure what your point was on salary sacrifice, I was simply stating there is no tax relief on such gross contribution.

To address the rest, it is not 'wrong' and it is not a 'magic £200'. It is the higher rate tax relief as detailed in the paragraph above.

I can't make it any simpler. A higher rate tax payer makes an £800 contribution that is grossed up internally to £1,000.

They then claim back a further £200 on their tax return.

This means they have exchanged/swapped/foregone £600 of net income today for £1,000 in their pension and £200 cash back.

This is how pension contributions work. You may not understand it but that does not make it wrong!

[CaptainSlow]

I think we'll have to agree to disagree on this. I'm pretty confident that my understanding is correct, admittedly I did all my tax exams a few years ago but its still the same and I have built a spreadsheet model for my pension contributions that reconciles with my payroll.


Your statement of
"This means they have exchanged/swapped/foregone £600 of net income today for £1,000 in their pension and £200 cash back."
Is not correct...your forego the £600 of net income only...there is no £200 cash back, otherwise you'll be only £400 worse off for £1k in the pension.


eta
My point about salary sacrifice is that you don't need to make a claim via a tax return as full tax relief has been sorted....and yes there obviously is tax relief on gross contributions...hence the term "gross".

Edited by CaptainSlow on Wednesday 17th October 11:03

[JulianPH]

CaptainSlow said:

I think we'll have to agree to disagree on this. I'm pretty confident that my understanding is correct, admittedly I did all my tax exams a few years ago but its still the same and I have built a spreadsheet model for my pension contributions that reconciles with my payroll.


Your statement of
"This means they have exchanged/swapped/foregone £600 of net income today for £1,000 in their pension and £200 cash back."
Is not correct...your forego the £600 of net income only...there is no £200 cash back, otherwise you'll be only £400 worse off for £1k in the pension.


eta
My point about salary sacrifice is that you don't need to make a claim via a tax return as full tax relief has been sorted....and yes there obviously is tax relief on gross contributions...hence the term "gross".

Edited by CaptainSlow on Wednesday 17th October 11:03

With respect, it is not about agreeing or disagreeing, it about the correct position on pension tax relief.

All taxpayers receive basic rate tax relief at source so have to invest £800 to receive a £1,000 pension contribution.

I think we can agree on that!

Higher rate taxpayers claim the additional 20% (£200) via their tax return. Highest rate tax payers reclaim their additional 25% (£250) in the same way. This money does not go into your pension, it goes into your pocket via your tax return.

It is this element of the tax relief that is the cash back I am referring to.

I am, like you, saying that you forego the £600 of net income only, but you achieve this via the £200 cash back on your tax reclaim as well as the £200 tax reclaim within your pension.

Hence my statement that a higher rate taxpayer foregoes £600 of net income for £1,000 in their pension and £200 cash back.

The £200 cash back is part of the 40% (£400) tax saving, not in addition to it. It just doesn't go into the pension but is paid back to you outside of it.

I hope that helps explain things.

Regarding salary sacrifice, tax relief does not come into play with gross contributions as there has been no tax deducted from which to claim relief from (i.e. it does not go through PAYE). This is just semantics though.

[NickCQ]

JulianPH said:

So they have exchanged £600 net earnings for £1,000 in their pension and £200 in their pocket.

The problem is the word AND in this statement. They don't have £1,000 in the pension AND £200 of cash.
That would imply they receive economic value of £1,200 by sacrificing £1,00 of gross income / £600 of net income.

[CaptainSlow]

JulianPH said:

Regarding salary sacrifice, tax relief does not come into play with gross contributions as there has been no tax deducted from which to claim relief from (i.e. it does not go through PAYE). This is just semantics though.

I think you're using the word relief when you mean refund.

Higher rate payers get full relief at source via salary sacrifice.

[CaptainSlow]

NickCQ said:

JulianPH said:

So they have exchanged £600 net earnings for £1,000 in their pension and £200 in their pocket.

The problem is the word AND in this statement. They don't have £1,000 in the pension AND £200 of cash.
That would imply they receive economic value of £1,200 by sacrificing £1,00 of gross income / £600 of net income.

Quite.

[JulianPH]

CaptainSlow said:

NickCQ said:

JulianPH said:

So they have exchanged £600 net earnings for £1,000 in their pension and £200 in their pocket.

The problem is the word AND in this statement. They don't have £1,000 in the pension AND £200 of cash.
That would imply they receive economic value of £1,200 by sacrificing £1,00 of gross income / £600 of net income.

Quite.

I am tired of explaining this now!

The AND is perfectly correct.

They have exchanged £600 of net income by placing £800 of net income into a pension where it receives basic rate tax relief at source (£200) within the pension and the balance of the higher rate (another £200) outside the pension via their tax return.

As I have already said this additional £200 is not in addition to the £400 tax relief, it is part of it.

So the £600 of net income has been exchanged for £1,000 in a pension AND £200 of cash as per the calculation above (and in my post above).

[rsbmw]

fk me, who cares. Move on!

[JulianPH]

CaptainSlow said:

JulianPH said:

Regarding salary sacrifice, tax relief does not come into play with gross contributions as there has been no tax deducted from which to claim relief from (i.e. it does not go through PAYE). This is just semantics though.

I think you're using the word relief when you mean refund.

Higher rate payers get full relief at source via salary sacrifice.

No, I am not.

Salary sacrifice does not involve any tax relief or tax refund as no tax has been deducted in the first place.

It doesn't matter what rate of tax you pay when it comes to salary sacrifice as the payment is made gross by your company before tax is deducted (so there is no tax relief available and not tax to refund).

[CaptainSlow]

rsbmw said:

fk me, who cares. Move on!

Agreed..I'm out.

[JulianPH]

CaptainSlow said:

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.

Just to come back to the OP's original question:

I believe what CaptinSlow is trying to say is that it costs you £60 to get £100 into your pension. The mechanics as to how this comes about are incorrect though.

You put in £80, they put in £20. You then reclaim the balance (another £20) through your tax return.

Yes, it is an excellent way to be more tax efficient as you get half of the income tax back in your pension and half of it off your tax bill today.