Tax relief on pension contribution
Discussion
For a DB scheme, how is tax relief calculated on a contribution made from savings, for someone paying 40% income tax on part of their taxable earnings?
Is the 20% tax paid counted first and then the 40% amount used for the rest.
Or does the 40% amount get used in the relief calculation first, and then the rest comes out of the 20% tax paid?
Some made up figures if the above is not clear as mud.
So if you have £75,000 taxable income, you pay 20% tax on the first £46,350 minus your tax free allowance of £11,850, which equals £6,900 tax.
On the remaining taxable income of £75,000 - £46,350 (£28,650), you pay 40% tax which equals £11,460 tax.
Total tax paid equals £18,360.
You make a pension contribution of £15,000.
Do you get tax relief for all £15,000 at 40% as your 40% tax rate band earnings are more than £15,000 and this marginal rate band is used up first in the calculation?
Or do you get tax relief for all £15,000 at 20%?
Is the 20% tax paid counted first and then the 40% amount used for the rest.
Or does the 40% amount get used in the relief calculation first, and then the rest comes out of the 20% tax paid?
Some made up figures if the above is not clear as mud.
So if you have £75,000 taxable income, you pay 20% tax on the first £46,350 minus your tax free allowance of £11,850, which equals £6,900 tax.
On the remaining taxable income of £75,000 - £46,350 (£28,650), you pay 40% tax which equals £11,460 tax.
Total tax paid equals £18,360.
You make a pension contribution of £15,000.
Do you get tax relief for all £15,000 at 40% as your 40% tax rate band earnings are more than £15,000 and this marginal rate band is used up first in the calculation?
Or do you get tax relief for all £15,000 at 20%?
rfisher said:
For a DB scheme, how is tax relief calculated on a contribution made from savings, for someone paying 40% income tax on part of their taxable earnings?
Is the 20% tax paid counted first and then the 40% amount used for the rest.
Or does the 40% amount get used in the relief calculation first, and then the rest comes out of the 20% tax paid?
Some made up figures if the above is not clear as mud.
So if you have £75,000 taxable income, you pay 20% tax on the first £46,350 minus your tax free allowance of £11,850, which equals £6,900 tax.
On the remaining taxable income of £75,000 - £46,350 (£28,650), you pay 40% tax which equals £11,460 tax.
Total tax paid equals £18,360.
You make a pension contribution of £15,000.
Do you get tax relief for all £15,000 at 40% as your 40% tax rate band earnings are more than £15,000 and this marginal rate band is used up first in the calculation?
Or do you get tax relief for all £15,000 at 20%?
Whilst I am no expert on DB schemes I can tell you how tax relief works on personal contributions to pensions in general.Is the 20% tax paid counted first and then the 40% amount used for the rest.
Or does the 40% amount get used in the relief calculation first, and then the rest comes out of the 20% tax paid?
Some made up figures if the above is not clear as mud.
So if you have £75,000 taxable income, you pay 20% tax on the first £46,350 minus your tax free allowance of £11,850, which equals £6,900 tax.
On the remaining taxable income of £75,000 - £46,350 (£28,650), you pay 40% tax which equals £11,460 tax.
Total tax paid equals £18,360.
You make a pension contribution of £15,000.
Do you get tax relief for all £15,000 at 40% as your 40% tax rate band earnings are more than £15,000 and this marginal rate band is used up first in the calculation?
Or do you get tax relief for all £15,000 at 20%?
The pension provider obtains the basic (20%) tax at source. This is within your pension.
Any contribution that was within the higher rate tax band earnings is reclaimed by you (outside of your pension) from HMRC (usually through your self assessment tax return).
So yes, tax relief is based on your highest rate of tax for all net relevant earnings contributed within this band.
So in your case above, you could contribute £28,650 a year and receive 40% (£11,460) tax relief on the whole amount (half within your pension and half via your tax return into your pocket).
Any contribution greater than this would only receive the basic (20%) tax relief within your pension.
To take this to its full conclusion, you would also receive 20% tax relief on your £11,460 allowance were you to hypothetically contribute 100% of your earnings into a pension.
Hope that helps.
Pension contributions are deducted before tax, so for tax purposes they reduce your income.
In your example the taxable pay becomes 75000 - 11850 - 15000 = 48150. So you'd only pay a sliver of 40% tax.
If you're in a salary sacrifice arrangement, which many people are now, pension contribution is deducted before you're paid at all, then that amount is paid into your pension by the employer. Effectively this reduces your actual salary, and you save on NI contributions as well.
In your example the taxable pay becomes 75000 - 11850 - 15000 = 48150. So you'd only pay a sliver of 40% tax.
If you're in a salary sacrifice arrangement, which many people are now, pension contribution is deducted before you're paid at all, then that amount is paid into your pension by the employer. Effectively this reduces your actual salary, and you save on NI contributions as well.
otherman said:
Pension contributions are deducted before tax, so for tax purposes they reduce your income.
Not strictly true. Whilst they certainly do reduce your income for tax purposes, any personal pension contributions (which is what I believe the OP is referring to) are made net of tax - with the tax reclaimed as described above.and the relief as described above is going to disappear in the future, it's only a matter of time
Also..max £40k tax free growth in a tax year on pension pots.....
because, why would you encourage the middle class to save in a pension with tax breaks? It's the other sectors that need to be made to save into pensions.....
grrr
The_Doc said:
and the relief as described above is going to disappear in the future, it's only a matter of time
Also..max £40k tax free growth in a tax year on pension pots.....
because, why would you encourage the middle class to save in a pension with tax breaks? It's the other sectors that need to be made to save into pensions.....
grrr
HiAlso..max £40k tax free growth in a tax year on pension pots.....
because, why would you encourage the middle class to save in a pension with tax breaks? It's the other sectors that need to be made to save into pensions.....
grrr
Not really comprehending what you are saying here.
You’re saying that growth on pension pots will be in some way limited to £40k per annum in the future?
Is that really what you mean or are you referring to the Annual Allowance for contributions, which is already subject to tapering for higher earners.
TFP said:
The_Doc said:
and the relief as described above is going to disappear in the future, it's only a matter of time
Also..max £40k tax free growth in a tax year on pension pots.....
because, why would you encourage the middle class to save in a pension with tax breaks? It's the other sectors that need to be made to save into pensions.....
grrr
HiAlso..max £40k tax free growth in a tax year on pension pots.....
because, why would you encourage the middle class to save in a pension with tax breaks? It's the other sectors that need to be made to save into pensions.....
grrr
Not really comprehending what you are saying here.
You’re saying that growth on pension pots will be in some way limited to £40k per annum in the future?
Is that really what you mean or are you referring to the Annual Allowance for contributions, which is already subject to tapering for higher earners.
Ironically, his statement (if taken literally) is true if you are £40k below the Lifetime Allowance!
Rather than edit to add, I'll just add.
Make hay with high(er) rate pension tax relief whilst the sun is still shining.
They have massively reduced what you can put in and ridiculously capped what your fund can be worth already.
This makes no sense whatsoever. It would take over 25 years to make the maximum available £40k annual contributions that hit the Lifetime Allowance (assuming growth after charges only kept up with CPI).
This is beyond what 99%(?) of the population could ever do. So what is the point?
Cap contributions (and therefore tax relief, no problem), but capping what your fund grows to become over decades of investment is ridiculous and the politics of envy.
I stopped bothering a long time ago. I don't even apply for planning permission any more on the land I own in my SIPP - if I got it the increase in value would generate a 55% tax charge.
Make hay with high(er) rate pension tax relief whilst the sun is still shining.
They have massively reduced what you can put in and ridiculously capped what your fund can be worth already.
This makes no sense whatsoever. It would take over 25 years to make the maximum available £40k annual contributions that hit the Lifetime Allowance (assuming growth after charges only kept up with CPI).
This is beyond what 99%(?) of the population could ever do. So what is the point?
Cap contributions (and therefore tax relief, no problem), but capping what your fund grows to become over decades of investment is ridiculous and the politics of envy.
I stopped bothering a long time ago. I don't even apply for planning permission any more on the land I own in my SIPP - if I got it the increase in value would generate a 55% tax charge.
https://www.nhsbsa.nhs.uk/member-hub/annual-allowa...
"The Annual Allowance is the maximum amount of tax free growth an individual’s pension can grow by in one year.
The limit:
covers all contributions to pension schemes but not the State Pension
is set by HMRC
If an individual exceeds this limit they may need to pay an Annual Allowance charge to HMRC"
My pot has grown on some years more than this, and the carry forward is useful but not infinite.
The limit is £40k/yr
So bang goes any Stakeholder pension contributions or the relief available on their contributions, which is what we were talking about at the start
The_Doc said:
https://www.nhsbsa.nhs.uk/member-hub/annual-allowa...
"The Annual Allowance is the maximum amount of tax free growth an individual’s pension can grow by in one year.
The limit:
covers all contributions to pension schemes but not the State Pension
is set by HMRC
If an individual exceeds this limit they may need to pay an Annual Allowance charge to HMRC"
My pot has grown on some years more than this, and the carry forward is useful but not infinite.
The limit is £40k/yr
So bang goes any Stakeholder pension contributions or the relief available on their contributions, which is what we were talking about at the start
The above is wrong / misleading:"The Annual Allowance is the maximum amount of tax free growth an individual’s pension can grow by in one year.
The limit:
covers all contributions to pension schemes but not the State Pension
is set by HMRC
If an individual exceeds this limit they may need to pay an Annual Allowance charge to HMRC"
My pot has grown on some years more than this, and the carry forward is useful but not infinite.
The limit is £40k/yr
So bang goes any Stakeholder pension contributions or the relief available on their contributions, which is what we were talking about at the start
"The annual allowance is a limit on the amount that can be contributed to your pension each year, while still receiving tax relief. It's based on your earnings for the year and is capped at £40,000."
sidicks said:
The above is wrong / misleading:
"The annual allowance is a limit on the amount that can be contributed to your pension each year, while still receiving tax relief. It's based on your earnings for the year and is capped at £40,000."
+1 For what sidicks said. "The annual allowance is a limit on the amount that can be contributed to your pension each year, while still receiving tax relief. It's based on your earnings for the year and is capped at £40,000."
Sorry Doc, you have misread things (and there is nothing wrong with that - we all do from time to time).
The_Doc said:
Nope.
My advisor and my accountant say otherwise.
Sorry, they are wrong (it is 'adviser', not 'advisor' by the way, but I shouldn't be pedantic!).My advisor and my accountant say otherwise.
I don't mean to come across in an awkward or negative way. What you have been told is obviously what you believe, even when this is not correct.
Feel free to PM me if you like, I'm not remotely trying to have a go, just provide facts.
Cheers
I'm in the pub now, so no follow up, but seriously guys this is a thing, widespread across the NHS for mid career and later.
Capped tax free pension input growth at £40k for 1995/2008 and the 2015 scheme. Growth not contributions. I have a specialist accountant and it comes from them too.
Capped tax free pension input growth at £40k for 1995/2008 and the 2015 scheme. Growth not contributions. I have a specialist accountant and it comes from them too.
I believe there is some taking at cross purposes here. The talk of the nhs scheme means defined benefit pension. If the accrued pension goes up by more than £40k in a year (defined as 20x the increase in annual pre-tax pension plus any increase in automatic lump sum) then a tax charge can be levied. So if someone gets say an increase in their accrued pension by £2500 pa in one tax year (perfectly possible for nhs consultant or a senior manager or a gp for that matter), multiply by 20 and you get £50k. That’s over £40k hence £10k of excess contribution (unless there is some unused allowance in the previous couple of years you can use).
Other people are talking defined benefit - in which case it’s the amount paid in contributions in a year that is the key and not any investment growth in the fund - which can grow by more than £40k with no penalty assuming the lifetime allowance isn’t exceeded when pension is crystalised.
So one lot of people are talking defined benefit (or final or average salary) schemes where you look at growth in pension accrual and others are talking defined contribution where you look at what is paid in and not increase in fund to determine excess over £40k
Other people are talking defined benefit - in which case it’s the amount paid in contributions in a year that is the key and not any investment growth in the fund - which can grow by more than £40k with no penalty assuming the lifetime allowance isn’t exceeded when pension is crystalised.
So one lot of people are talking defined benefit (or final or average salary) schemes where you look at growth in pension accrual and others are talking defined contribution where you look at what is paid in and not increase in fund to determine excess over £40k
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