Higher pension tax relief question

[Whatsmyname]

If the government in November are going to abolish this perk would the following apply?

Say it’s odds on to happen so I slam a big lump sum into my pension today would that qualify for the tax relief when I have to self assessment? As the relief will be claimed after the relief is abolished but the payment was made before it was abolished iyswim.

Thanks

[OddCat]

I would imagine that HMG would have to have a cut off date with contributions before that date not being affected. More likely though that it will apply from April 6th 2021 and not half way through a tax year.

Bot sure how they are going to handle empoyer scheme cases where the contribution deductions are made from gross pay before tax and thus the individual automatically receives tax relief at their highest marginal rate. Same with Salary Sacrifice agreements.

Reduced higher rate relief, or a single relief rate for all (say 25%), is okay in theory but tricky in practice. Many employers will need a good amount of time to make the necessary adjustments.

[JulianPH]

If you put money in today, then you do so under today's rules.

So yes you will get the higher rate tax relief.

I can't see this happening TBH. The media have been suggesting this for years, but the issuse it would cause would be massive.

How could you deal with salary sacrifice, company pension contributions and final salary schemes (which all MPs and civil servants are on).

Of course I could be wrong, but to introduce a system that gave final salary (or DB) pensions double the tax break of personal pensions/SIPPs would be madness.

[foiled]

So pay 25% tax when it goes into the pension (45%-20%) and then pay another 40% when I take the pension out (and 25% tax free)

So for every £1000 gross take home, I could either put £550 into ISA, or £750 into a SIPP which becomes £525 when you take the 25% tax free element, and the rest taxed at 40%.

Think I'd be maxing out the ISA then anything left into the SIPP

[Whatsmyname]

This is how I think mine works ??

Pay X into pension to which 20% of X is claimed as tax relief then you do self assessment and get another 20% relief on X.

Don’t know what you want for a pension but 25% tax free lump and then you and your partner can claim another £25k tax free per year.

Also I am maxing ISA too.

[JulianPH]

foiled said:

So pay 25% tax when it goes into the pension (45%-20%) and then pay another 40% when I take the pension out (and 25% tax free)

So for every £1000 gross take home, I could either put £550 into ISA, or £750 into a SIPP which becomes £525 when you take the 25% tax free element, and the rest taxed at 40%.

Think I'd be maxing out the ISA then anything left into the SIPP

That is not how it works. You don't pay any tax on money you pay into a pension/SIPP. You only pay your marginal rate of 75% of what you take out.

If the higher (and highest) rate of tax were to be abolished on pension contributions, then pensions would become obsolete for many millions of people overnight.

[JulianPH]

Whatsmyname said:

This is how I think mine works ??

Pay X into pension to which 20% of X is claimed as tax relief then you do self assessment and get another 20% relief on X.

Don’t know what you want for a pension but 25% tax free lump and then you and your partner can claim another £25k tax free per year.

Also I am maxing ISA too.

It is 25% in both cases, as you have to gross up on personal contributions, not net down.

I know what you meant though!

You and your partner cannot share your tax allowance on your pension, only on your own individual pension income (which I think is what you were saying).

Obviously any other income (such a s the state pension, but not ISAs) would detract from your personal allowance(s).

[Whatsmyname]

I was looking at it as if 2 people had separate pensions in regards to tax free allowance.

Can you explain the gross up / net down thing?

[JulianPH]

Whatsmyname said:

I was looking at it as if 2 people had separate pensions in regards to tax free allowance.

Can you explain the gross up / net down thing?

Understood, but when the state pension kicks in this will be added to both of your taxable incomes.

If you make a net contribution of £80, in order for this to be grossed up to £100 then you receive £20 tax relief. £20 is 25% of £80, so you effectively see a 25% rise on your net contribution.

You then claim back the higher rate tax element yourself (this goes to you, not your pension), which is another 25% of the £80, leaving the net cost of a £100 pension contribution at £60.

This is an effective 40% discount (netting down) or a 66.66% uplift (grossing up).

Either way, fantastic value for money for any higher rate tax payer!

[Whatsmyname]

Thanks for the explanation J.

[ellroy]

Also don’t forget that potentially you can carry forward unused allowances to the current tax year, so max contribution potentially to get tax relief on would be up to £160,000 in the current tax year.

My perspective would be that if you’ve got the funds earmarked anyway, and don’t need access to your money immediately, is to do it. You’ll be in the strongest position if change does come. It’s highly unlikely that a change happens overnight, but that’s not to say it couldn’t.