Pension contributions

[audi321]

Hi all. Simple question but I fear the answer isn't so simple.

All numbers rounded for simplicity.

If someone has employment income of £55k and rental property profit of £5k and they want to make a pension contribution of £10k am I right in thinking they would only get 40% relief on £5k as the £5k property income isn't relevant earnings?

A follow up question, but if the property profit isn't relevant earnings, does this still affect the child benefit reclaim?

Thanks all for any help.

[MaxFromage]

You will get 40% relief on the rental income as well. In this scenario, the type of income is not relevant.

You will also get a full deduction against your income for child benefit purposes. Although bear in mind child benefit reduction doesn't kick in until £60K for 24/25.

Just bear in mind that (if you are using it to calculate your rental profit) mortgage interest does not reduce your gross income. It is deducted as a 20% tax credit.

[Tighnamara]

MaxFromage said:

You will get 40% relief on the rental income as well. In this scenario, the type of income is not relevant.

You will also get a full deduction against your income for child benefit purposes. Although bear in mind child benefit reduction doesn't kick in until £60K for 24/25.

Just bear in mind that (if you are using it to calculate your rental profit) mortgage interest does not reduce your gross income. It is deducted as a 20% tax credit.

Are you sure about property rental receiving pension tax relief ?

“Rental income from a buy to let property is not eligible for pension tax relief as it’s considered ‘unearned income’. That’s because it’s received from a passive income source (property) rather than through employment”

[Sheepshanks]

I think it works by bumping up the higher rate threshold - my wife did it for 23/24, but her additional income was dividends and interest. She put £25K (her gross was about £33K) into her pension so her higher rate threshold was something like £68K, so all of her additional income was taxed at 20%.

OP - do you realise the way the tax on pension contributions works? If you want to add £10K to your pension you send £8K and the pension provider gets £2K direct from HMRC. You get the other 20% as tax relief due to the increased higher rate threshold.

[TwigtheWonderkid]

Tighnamara said:

Are you sure about property rental receiving pension tax relief ?

“Rental income from a buy to let property is not eligible for pension tax relief as it’s considered ‘unearned income’. That’s because it’s received from a passive income source (property) rather than through employment”

If your only income was from that source, then maybe so. If say he had a load of rental properties bringing in £60K/year. But if you earn £55K, you could be taking £45K and putting £10K into the pension on salary sacrifice, and keeping your rental income. And effectively getting full tax relief.

[MaxFromage]

Tighnamara said:

Are you sure about property rental receiving pension tax relief ?

“Rental income from a buy to let property is not eligible for pension tax relief as it’s considered ‘unearned income’. That’s because it’s received from a passive income source (property) rather than through employment”

As I noted, in his scenario he will by default. Technically he's not, but it reduces the tax paid on the earned income, dropping the rental income into basic rate.

[Tighnamara]

TwigtheWonderkid said:

Tighnamara said:

Are you sure about property rental receiving pension tax relief ?

“Rental income from a buy to let property is not eligible for pension tax relief as it’s considered ‘unearned income’. That’s because it’s received from a passive income source (property) rather than through employment”

If your only income was from that source, then maybe so. If say he had a load of rental properties bringing in £60K/year. But if you earn £55K, you could be taking £45K and putting £10K into the pension on salary sacrifice, and keeping your rental income. And effectively getting full tax relief.

Agreed , it was the opening comment that threw me “ You will get 40% relief on the rental income as well”

[Sheepshanks]

MaxFromage said:

As I noted, in his scenario he will by default. Technically he's not, but it reduces the tax paid on the earned income, dropping the rental income into basic rate.

I think the way it's done - HMRC directly refunding 20% to the pension provider and then raising your 40% theshold - is confusing. Your tax calculation still shows as if you paid tax on the pesnion contribution - which you did, but then they paid it back out.

It makes the calculation messy. For my wife's return we really didn't know if she'd get the full £1000 tax free interest or if it would be reduced to £500 until she pressed the button at the end. She did get £1000.

[audi321]

Thanks guys. It’s not easy to predict is it. You’d have thought they’d be some software which could work it out in advance of the tax year end, so you could calculate how much to pay into a pension to maximise 40% relief.

I’d happily pay for some software to be able to do this if anyone knows of such?

[MaxFromage]

audi321 said:

Thanks guys. It’s not easy to predict is it. You’d have thought they’d be some software which could work it out in advance of the tax year end, so you could calculate how much to pay into a pension to maximise 40% relief.

I’d happily pay for some software to be able to do this if anyone knows of such?

You usually just add up your TOTAL income less allowable deductions (gift aid etc) to calculate your net income and see how far over the £50K threshold you are (A). Then you see how much you are actually able to contribute by working out your net relevant earnings (B)- https://www.litrg.org.uk/pensions/paying-pensions/... You can PERSONALLY only contribute up to your net relevant earnings into your pension. You have to consider employee and employer pension contributions paid as well for those personal contributions and overall contribution limits respectively. If your net relevant earnings figure (B) is more than the £50K threshold figure (A), you can pay that amount in, bearing in mind that will be gross and you contribute net. If not you are limited to what you can contribute.

There are a few caveats depending on your level of income and a few other complications.

You can get your net income here:

https://www.rossmartin.co.uk/calculators/6557-adju...

It's a relatively simple calculation if you know all the required numbers, but I'm struggling to find a calculator which is surprising.

By all means post up your figures here and there's a few people who can work it out. It only tax a few seconds if you're used to doing it.

[MaxFromage]

Sheepshanks said:

I think the way it's done - HMRC directly refunding 20% to the pension provider and then raising your 40% theshold - is confusing. Your tax calculation still shows as if you paid tax on the pesnion contribution - which you did, but then they paid it back out.

It makes the calculation messy. For my wife's return we really didn't know if she'd get the full �1000 tax free interest or if it would be reduced to �500 until she pressed the button at the end. She did get �1000.

Yes I can see why it's confusing. As an accountant, I just see how much income is over the higher rate threshold and then see if the net relevant earnings are there to allow that amount of pension contribution. Then the basic rate threshold is extended, providing higher rate tax relief on whatever income falls into it.

[Sheepshanks]

audi321 said:

Thanks guys. It’s not easy to predict is it. You’d have thought they’d be some software which could work it out in advance of the tax year end, so you could calculate how much to pay into a pension to maximise 40% relief.

I’d happily pay for some software to be able to do this if anyone knows of such?

I guess the tricky bit is being sure of your numbers before the end of the tax year and getting the payment into your pension done (the tax rebate into the pension can catch up later).

If your numbers are as straighforward as suggested, and you get the full personal allowance of £12570, then any income over £50270 is taxed at 40%. So as you said in your OP, paying £10K gross (which means an £8K payment from you, but you declare it as £10K on self assessment) has the effect of bumping up your 40% theshold to £60270 so you won't pay any tax at 40%.

(I'm assuming rental income doesn't have any tax free allowance, like interest does).

[audi321]

Thanks for the offer Max.

So rough figures would be (obviously asking for a friend):

Employment £55,000
Rental Income £10,000
Allowable rental expenses £2,000
BTL interest £3,000

There's nothing else relevant to take into account (i.e. just standard £12,570 allowance etc, etc).

What would be the net pension contribution needed to maximise 40% relief?

Edited by audi321 on Sunday 9th February 21:18

[MaxFromage]

You have gross income of £55K+£8K=£63,000. (interest is ignored for gross income)

£63,000 less £50,270 is £12,730. 80% of £12,730 is £10,184.

So you need to pay £10,184 in to pay no higher rate tax.

This assume no gift aid and employee/employer contributions don't take you over your allowances.

[audi321]

MaxFromage said:

You have gross income of £55K+£8K=£63,000. (interest is ignored for gross income)

£63,000 less £50,270 is £12,730. 80% of £12,730 is £10,184.

So you need to pay £10,184 in to pay no higher rate tax.

This assume no gift aid and employee/employer contributions don't take you over your allowances.

Thanks Max......all clear now! For some reason I had it in my head that rental income wasn't 'relevant earnings' and therefore wasn't eligible for pension relief (god knows why I thought this).

Given that I'm struggling to find a website or software with the 2024/25 tax rates on (but I have found one for the 2023/24 rates) has anything changed between these tax years which would impact anything in these circumstances (other than the child benefit going from £50-£60k to £60-£80k)?

Edited by audi321 on Sunday 9th February 23:36

[MaxFromage]

audi321 said:

Thanks Max......all clear now! For some reason I had it in my head that rental income wasn't 'relevant earnings' and therefore wasn't eligible for pension relief (god knows why I thought this).

Given that I'm struggling to find a website or software with the 2024/25 tax rates on (but I have found one for the 2023/24 rates) has anything changed between these tax years which would impact anything in these circumstances (other than the child benefit going from £50-£60k to £60-£80k)?

Edited by audi321 on Sunday 9th February 23:36

Rental income isn't relevant earnings and is not eligible for tax relief. However you have to separate out the availability of relief on your pension contributions and the effect it has on your tax. Because you have relief on your earned income, this drops your rental income into basic rate relief.

Nothing else has change with reference to this from 23/24 to 24/25.