Pensions and Tax Question

Looking at this another way.....

If I pay all of my taxable earnings (ie gross earnings minus tax-free allowance) into my personal pension then can I expect my total tax bill for that year to be equal to the difference between my net contribution and the gross amount that goes into my fund in that year?

Am I allowed to pay in more than my total taxable earnings in one year and if so does the above tax calculation still apply?

Where do NI contributions fit into this?

Thanks for any help Thomas

The maximum gross pension contribution is 100% of your earnings - that excludes unearned income eg interest/dividends.

So if you earn 50,000 you can pay 50,000 gross into your pension, ie

40,000 net.

The pension company will reclaim 20% tax, you can claim higher rate relief via your tax return/tax code. The way HRMC calculate your tax due is to extend your basic rate band by your gross pension contribution - this gives you the higher rate relief.

Note that you get tax relief on the whole lot, even the part within the personal allowance, so if you pay 100% of your earnings into your pension you get more tax relief than you paid tax!

They don't. If you want to avoid NI contributions you need to persuade your employer to pay direct into your pension scheme - that saves both you and them NI.

Thanks a million, that's really useful. I hadn't appreciated that the maximum I can pay in is 80% of gross earnings not 100% - makes sense I suppose.

So, is something along the following lines possible.

-I am over 55 with an existing pension pot of 400k, and a gross annual income of 100k.

-At the end of tax year 2009/2010 I pay 80k into my pension fund reducing my net annual income by 53k after allowing for reduced taxation.

-At the begining of tax year 2010/2011 I withdraw 50k as a tax-free lump sum from my pension effectively restoring my net annual income.

-Thus, at no net cost to me I have increased my pension pot by 50k. (ok the cost is a reduction in the size of any future tax free lump sum)

Is there any reason why I can't so the above?

Plus, if I understand correctly, I will still have 1/2 or 200k of my pension fund which has not been converted (or whatever the term is) so I can do the same trick the following year if my income and savings permit.

Many Thanks Thomas

Don't forget to take into account your personal allowances.

In what respect? Do you mean that I can add this to my total earnings when calculating how much I can pay into my pension in a year?

Thanks Thomas

There is no investment ceiling. But the minimum investment limit has been fixed at Rs 500 a month or Rs 6,000 annually. Subscribers are required to contribute at least once a quarter but there is no ceiling on how many times you invest during the year.

It would reduce it by about 69k. Your basic rate band would be extended so that you pay no HRT - so you'd save about 11k in tax.

If you withdraw your net contribution of 69k your pension pot has increased by 31k at no cost to you - that's just the benefit of the TFLS.

Thanks a million.

I think I got the figures a bit wrong last time but I think I must still be going wrong somewhere.

According to:

If I earn 100k and pay nothing into my pension I take home 65k. If I earn 100k and pay 50k (which grosses up to 62.5k) into my pension I take home 35k. So the cost of putting 62.5k into my pension is 30k. If I take this 30k back out of my pension I'm left with a net 32.5k at no cost. If I do this the next year I have added 65k at no cost.

Does that sound about right?

Thanks Thomas

If your income is £6,475 there is no tax advantage in paying into a pension so you have to take that into account.

Isn't there? I thought you could pay up to £2880 pa into a personal stakeholder pension, and the taxman will gross this up to £3600, even if you have no taxable income.

Or has this (and the "immediate vesting" option for over 50s) been discontinued?

You can. In a RAS scheme you get 20% tax relief even if you don't pay tax.

Nope. But watch the PBR next month...

No. That's for 50k gross not net. 40k net. Gives you an extra 10k HRT relief, so reducing your take home by 30k.

Pension contribution amounts are usually quoted gross not net - IIRC the tax return asks for gross figures and so I guess does the above web site (though I CBA to check).